TWO HARBORS INVESTMENT CORP
For the period ended Dec 31, 2024. Filed Feb 18, 2025.
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A company's yearly report to the SEC, with audited financial statements. It is the fullest account a company gives of its business, its finances and the risks it sees.
FY2024 · Filed Feb 18, 2025
TWOD$26.33+0.0%Stored close · as of Oct 2, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-K
Period ended 2023-12-31; filed 2024-02-20.
0001465740-24-000076
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-K
Period ended 2024-12-31; filed 2025-02-18.
0001465740-25-000083
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 151 previous paragraphs and 149 current paragraphs.
60 unchanged; 68 reworded; 20 added; 21 removed; 2 previous and 1 current paragraphs rearranged.
Tables are not compared: 29 previous and 31 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (20)
Current report
RoundPoint has approvals from Fannie Mae and Freddie Mac to service residential mortgage loans, and services mortgage loans underlying TH MSR Holdings’ MSR as well as MSR owned by third parties. Late in the second quarter of 2024, RoundPoint began operating its in-house, direct-to-consumer originations platform, which was established primarily to benefit our MSR portfolio through the retention or recapture of existing borrowers by providing them with competitive refinance and purchase mortgage options. The originations platform also originates loans for new borrowers that do not currently have a mortgage loan serviced by RoundPoint and brokers second lien loans to our borrowers. For our own MSR portfolio, adding new or recaptured MSR through our origination platform is intended to hedge faster than expected MSR prepayment speeds in a refinance environment, and requires less capital relative to acquiring MSR through flow and bulk purchases from third-party originators. In addition, origination activities are generally counter-cyclical to MSR; MSR fair value tends to move opposite to origination volume. For example, the value of MSR typically increases in periods marked by low origination activity and vice versa. Thus, origination activities provide supplementary sources of profitability to our stockholders while also hedging our MSR.
Current report
We estimate the fair value of our MSR using a discounted cash flow model, which incorporates both observable and unobservable market data, including principal balance, note rate, geographical location, loan-to-value (LTV) ratios, FICO and other loan characteristics, along with servicing fee, ancillary income, earnings rates on escrow balances and recapture rates. Significant unobservable inputs include prepayment speeds; option adjusted spread, or OAS, which represents the incremental spread added to the risk-free rate to reflect the effects of any embedded options and other risk inherent in MSR; and cost to service. We obtain third-party valuations, industry surveys and other available market data quarterly to assess the reasonableness of the the significant unobservable inputs used in the cash flow model, as well as fair value calculated by the cash flow model, subject to internally-established hierarchy and override procedures.
Current report
Interest rates remained volatile throughout 2024 as fixed-income market participants considered the impact on Federal Reserve’s policy (the Fed) of often conflicting economic signals on employment and inflation. By the third quarter, inflation data showed enough progress towards the Fed’s two percent target that the Fed cut rates by 50 basis points in September. The Treasury yield curve steepened as the Fed cut rates while robust supply of longer-term Treasuries kept longer end rates high. Mortgage spread volatility declined as the Fed began to cut rates, though nominal current coupon spreads remained wider than longer-term averages. MSR valuations were well supported throughout the year, with balanced supply and demand and favorable prepayment rates.
Current report
During the fourth quarter of 2024, interest rates increased across the Treasury curve as both job and inflation data firmed up, driving a shift from the third quarter of 2024 to a hawkish stance from the Fed. The Fed delivered two 25 basis point interest rate cuts during the fourth quarter of 2024, bringing the total to 100 basis points for the year, while the market’s expectations for more cuts in 2025 went from 4.5 to start the fourth quarter of 2024 to 1.5 cuts by quarter end, making it one of the most volatile episodes in recent Fed policy cycles. The bond market also had to contend with the outcome of the U.S. Presidential election, which fueled a rise in short-dated interest rate volatility in October, spiking to the 95th percentile of history in the post-COVID era. As the results of November’s U.S. Congressional and Presidential elections made it clear that the Republican Party would be in control of both the executive and legislative branches of government, expansionary fiscal policy and the potential economic impact from tariffs led to a bearish steepening of the Treasury rate curve. Over the fourth quarter of 2024, the 10-year Treasury yield increased by 79 basis points to finish at 4.57% while the 2-year increased by 60 basis points to 4.24%, steepening the Treasury yield curve by 19 basis points. The S&P 500 was higher by about 2.1%.
Current report
Mortgage performance was volatile from month-to-month, as spreads widened significantly in October as rates and volatility increased only to recover in November following the Presidential election. Mortgages gave back some of their gains in December in light of the continued strengthening economic data and a more hawkish Fed posture toward year end. Ultimately, our preferred implied volatility gauge, 2-year options on 10-year rates, increased from 94 to 101 basis points on an annualized basis, right in the middle of its range for 2024. The nominal spread on current coupon MBS finished 11 basis points wider at 117 basis points to the Treasury curve, while the option-adjusted spread finished 6 basis points wider at 23. Nominal spreads remained attractive to longer-term averages, while option-adjusted spreads are tighter on a historical basis. Given that the Treasury rate curve bear steepened and implied volatility ticked up, on a hedged basis lower coupon mortgages generally underperformed while higher coupon mortgages outperformed. Higher coupon specified pools were the best performer, outperforming TBAs by at least a quarter point.
Current report
Primary mortgage rates increased in the fourth quarter of 2024, tracking the increase in yields on the longer end of the Treasury curve. The Freddie Mac 30-year rate increased by 78 basis points to 6.85%. Overall prepayment rates for 30-year Agency RMBS increased by 0.4% percentage points quarter-over-quarter to 6.9% CPR, as higher coupon speeds reflected the mini-refinance wave triggered by the fall in rates in the third quarter of 2024. Borrowers with a refinance incentive responded to the lowest mortgage rates in September with a propensity similar to borrower behavior back in 2019. Our MSR portfolio, with a low gross mortgage rate of 3.46%, came in at 4.9% CPR in the fourth quarter of 2024, down 0.4% percentage points compared to the third quarter of 2024, as slower seasonal factors began to take effect.
Current report
The housing market has shown some signs of improvement with home sales running at about 10% more volume on a year-on-year basis and inventory has begun to climb, though homes available for sale and turnover in the housing market remain at historically low levels. Home prices finished the year with a small gain and we expect another small but steady increase in 2025.
Current report
The MSR market remained stable and well supported, with bulk deals consistently receiving double digit competitive bids. Some large scale bids/acquisitions in the fourth quarter lifted 2024 transfers to $622 billion UPB, approximately the same amount as 2023, though the number of bulk bid opportunities dropped by 25% year-over-year.
Current report
RMBS funding markets remained stable and available throughout the fourth quarter of 2024. Spreads for repurchase agreements widened with financing for RMBS between SOFR plus 25 to 35 basis points. The increased spreads were the result of several factors including potential year-end funding pressures and uncertainty around Fed actions at their November and December meetings. In retrospect, year-end was uneventful in the funding markets and early indications for 2025 are that spreads are normalizing into a tighter historical context.
Current report
Looking forward, given the fluidity of expectations on how the Fed will be managing rates, market participants are expected to remain keenly focused on incoming data on inflation and employment. New policy proposals and implementation by the incoming U.S. administration could add to market volatility. Nonetheless, driven by the rise in mortgage rates in the fourth quarter of 2024 plus weaker winter turnover seasonal factors, we anticipate prepayment rates will slow down in the near term. We expect our low mortgage rate MSR holdings, which remain hundreds of basis points below prevailing rates, to prepay below 4% CPR in the first quarter of 2025. Our portfolio is comprised primarily of lower interest rate mortgages, with less than 1% of the portfolio having incentive to refinance at current rates. We expect there to remain ample opportunities to add MSR at attractive spreads even as MSR transfer volume continues to normalize to pre-COVID levels. Nominal current coupon spreads remain wide compared to long-term history, and when either paired with MSR or hedged with rates, generate attractive levered returns. Though there are good reasons to believe that elevated interest rate volatility will persist for the short- to medium-term, the level of mortgage spread volatility has materially declined from early parts of this interest rate cycle, improving the risk adjusted return profile.
Current report
Late in the second quarter of 2024, RoundPoint began operating its in-house, direct-to-consumer originations platform. Prior to the launch of originations, our mortgage loans held-for-sale consisted of a small number of loans purchased from the collateral underlying our MSR, which were not pledged for any form of financing.
Current report
Prior to the acquisition of RoundPoint, we did not directly service mortgage loans; instead, we contracted with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the mortgage loans underlying our MSR. These third-party subservicing costs and other servicing expenses directly related to our MSR portfolio are included within the servicing costs line item on our consolidated statements of comprehensive income (loss). Post-acquisition, all servicing-related expenses incurred by RoundPoint as an operating company are included within the other operating expenses line item on our consolidated statements of comprehensive income (loss). The decrease in servicing costs during the three and twelve months ended December 31, 2024, as compared to the same periods in 2023, was the result of lower third-party subservicing fees due to the acquisition of RoundPoint.
Current report
Gain (Loss) On Servicing Asset
Current report
Loss On Other Derivative Instruments
Current report
Gain On Mortgage Loans Held-For-Sale
Current report
The following table provides a summary of the total net realized and unrealized gains (losses) recognized on mortgage loans held-for-sale and the related derivative instruments used to manage exposure to market risks primarily associated with fluctuations in interest rate risks related to our origination pipeline during the three and twelve months ended December 31, 2024 and 2023:
Current report
Late in the second quarter of 2024, RoundPoint began operating its in-house, direct-to-consumer originations platform. Prior to the launch of originations, our mortgage loans held-for-sale consisted of a small number of loans purchased from the collateral underlying our MSR.
Current report
Other Comprehensive (Loss) Income
Current report
The following table provides a summary of the components of other comprehensive (loss) income during the three and twelve months ended December 31, 2024 and 2023:
Current report
(4)These repurchase facilities are secured by the related VFNs issued by TH MSR Issuer Trust and collateralized by portions of our MSR portfolio.
Removed paragraphs (21)
Previous report
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Previous report
Effective September 30, 2023, one of our wholly owned subsidiaries, Matrix, acquired RoundPoint from Freedom Mortgage Corporation after the completion of customary closing conditions and receiving the required regulatory and GSE approvals. Upon closing, all servicing and origination licenses and operational capabilities remained with RoundPoint, and RoundPoint became a wholly owned subsidiary of Matrix. Management believes this acquisition will add value for stakeholders of Two Harbors through cost savings achieved by bringing the servicing of our MSR portfolio in-house, greater control over our MSR portfolio and the associated cash flows, and the ability to participate more fully in the mortgage finance space as opportunities arise.
Previous report
LIBOR transition
Previous report
The London Interbank Offered Rate, or LIBOR, has been used extensively in the U.S. and globally as a “benchmark” or “reference rate” for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives. On March 5, 2021, Intercontinental Exchange Inc. announced that ICE Benchmark Administration Limited, the administrator of LIBOR, intended to stop publication of the majority of USD-LIBOR tenors on June 30, 2023. In the U.S., the Alternative Reference Rates Committee, or ARRC, has identified the Secured Overnight Financing Rate, or SOFR, and, in some cases, the forward-looking term rate based on SOFR published by CME Group Benchmark Administration Limited, or Term SOFR, plus, in each case, a recommended spread adjustment, as its preferred alternative rates for U.S. dollar-based LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions. Numerous industry wide and company-specific transitions as it relates to derivatives and cash markets exposed to LIBOR were completed in connection with its phase-out on June 30, 2023. Our material contracts that are or were indexed to USD-LIBOR have been amended to transition to an alternative benchmark, where necessary. Any other unmodified agreements that incorporate LIBOR as the referenced rate either (i) already had provisions in place that provide for an alternative to LIBOR upon its phase-out or that are governed by the Adjustable Interest Rate (LIBOR) Act, or the LIBOR Act, (ii) matured or (iii) were terminated prior to June 30, 2023.
Previous report
The fourth quarter of 2023 was marked by continued volatility in rates and spreads. Fueled by a stronger-than-expected September employment report, coupled with the outbreak of war in the Middle East, interest rates moved steadily higher in early October. At its peak, the 10-year treasury yield briefly touched 5%, approximately 40 basis points higher than it was at the beginning of the quarter. An abrupt turn of sentiment followed in early November after Chairman Powell’s optimistic assessment of the efforts of the Federal Reserve, or the Fed, to bring down inflation and engineer a soft landing. Interest rates quickly reversed course and declined 36 basis points over the next three trading sessions. Supportive economic data in November, as well as dovish Fed commentary, drove the market to price in as many as six interest rate cuts in 2024. The entire yield curve responded, as the 10-year treasury rate finished the quarter at a yield of 3.88%, 69 basis points lower than it started at the beginning of the quarter, and the 2-year treasury rate declined 79 basis points to 4.25%, resulting in a net 10 basis points steepening of the yield curve. From peak to trough, the 5-year and 10-year treasury yields moved 120 basis points in the quarter.
Previous report
Following the rise in interest rates in October, mortgage spreads underperformed, widening by about 20 basis points. Rates reversed course in November, and spreads tightened back by about 35 basis points. This tightening trend continued in December with the Fed strongly signaling that the period of rate hikes was over. Ultimately, current coupon mortgage spreads on a nominal basis finished the quarter at 118 basis points, tighter by 33 basis points. This was at the tighter end of the 2023 range of 100 to 167 basis points. Though the current coupon spread is still much wider than the longer-term “non-QE” average of 80 basis points, it reflects an environment of high realized rate volatility and tepid demand from depository institutions. Being at the tighter end of the range is likely the result of the market’s expectation for more than five Fed rate cuts in 2024, a steeper forward curve and lower forward implied volatility.
Previous report
As yields for Treasuries declined, 30-year mortgage rates fell by 70 basis points, to 6.42%, during the quarter. Even with this decline, prepayments are almost entirely dependent on housing turnover as only 4% of the mortgage universe was rate refinanceable at year end. As anticipated, reported prepayment rates broadly declined by 16% in the fourth quarter. This decline reflected a seasonal slowdown and an effective mortgage rates of over 7%, the highest in 20 years. Despite 30-year mortgage rates falling by 70 basis points over the quarter, 96% of mortgages remained outside the refinance window.
Previous report
As is typical, the pace of MSR sales slowed in the fourth quarter with $53 billion offered in the bulk market. This brought the total MSR offered for the year to just under $500 billion. 2023 finished as the second most active year in the MSR market, falling just behind 2022’s total of $525 billion. Lower supply in the fourth quarter did little to affect the traded spreads of MSR, which have been stable over the past several quarters, further supported by a benign prepayment environment. Bids remain well supported, as evidenced by sellers typically receiving a high single digit number of bids.
Previous report
RMBS funding markets remained stable and liquid throughout the quarter with ample balance sheet available even over quarter ends. Spreads on repurchase agreements widened slightly into the fourth quarter and year end with financing for RMBS between SOFR plus 23 to 25 basis points.
Previous report
Looking forward, our MSR portfolio, with a weighted average mortgage rate of only 3.45%, still has less than 1% of its balances with 50 basis points or more of rate incentive to refinance. If mortgage rates remain at year-end levels for the first quarter of 2024, we expect prepayment rates for our MSR to increase only by about 5 to 10%. Even with this increase, prepayment speeds are at historically low levels and continue to provide a tailwind for this component of our strategy. As mentioned previously, nominal spreads for RMBS also remain at historically attractive levels, though at the tighter end of recent ranges. If the Fed is indeed done hiking rates, with the next policy action being a rate cut in 2024, we would expect a narrower range for spreads this year, though volatility can remain high until the path forward becomes more clear. Given the levered returns available in the market for our combined strategies, we remain optimistic about the return potential of our portfolio of investments.
Previous report
All per share amounts, common shares outstanding and common equity-based awards for all periods presented have been adjusted on a retroactive basis to reflect the one-for-four reverse stock split effected on November 1, 2022.
Previous report
Our GAAP net loss attributable to common stockholders was $444.7 million and $152.0 million ($(4.56) and $(1.60) per diluted weighted average share) for the three and twelve months ended December 31, 2023, respectively, as compared to GAAP net loss attributable to common stockholders of $262.4 million and GAAP net income attributable to common stockholders of $186.8 million ($(3.04) and $2.13 per diluted weighted average share) for the three and twelve months ended December 31, 2022, respectively.
Previous report
Results of Operations
Previous report
The following analysis focuses on financial results during the three and twelve months ended December 31, 2023 and 2022.
Previous report
The increase in cost of funds associated with the financing of Agency Derivatives for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022, was the result of rising interest rates.
Previous report
The decrease in servicing expenses during the three months ended December 31, 2023, as compared to the same period in 2022, was the result of lower third-party subservicing fees due to the acquisition of RoundPoint. The slight increase in servicing expenses during the year ended December 31, 2023, as compared to the same period in 2022, was driven by higher deboarding expenses as we transition our MSR portfolio to RoundPoint from other subservicers and overall higher cost to service, offset by lower third-party subservicing fees during the three months ended December 31, 2023 due to the acquisition of RoundPoint.
Previous report
(Loss) Gain On Servicing Asset
Previous report
Our term notes previously incorporated LIBOR as the referenced rate, which was replaced with Term SOFR, plus a spread adjustment, during the three months ended June 30, 2023. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Conditions and Outlook - LIBOR transition” in this Annual Report on Form 10-K for further discussion.
Previous report
(2)U.S. Treasury securities effectively borrowed under reverse repurchase agreements.
Previous report
(4)This repurchase facility is secured by a VFN issued in connection with our securitization of MSR, which is collateralized by our MSR.
Previous report
(1)U.S. Treasury securities effectively borrowed under reverse repurchase agreements.
Reworded paragraphs (68)
Previous wording
We are a Maryland corporation that invests in, finances and manages MSR, Agency RMBS, and, through our operational platform, RoundPoint, is one of the largest servicers of conventional loans in the country. We are structured as an internally-managed REIT and our common stock is listed on the NYSE under the symbol “TWO”.
Current wording
We are a Maryland corporation that invests in, finances and manages MSR and Agency RMBS, and, through our operational platform, RoundPoint Mortgage Servicing LLC, or RoundPoint, we are one of the largest servicers of conventional loans in the country. We are structured as an internally-managed REIT and our common stock is listed on the NYSE under the symbol “TWO.” We seek to leverage our core competencies of understanding and managing interest rate and prepayment risk to invest in our portfolio of MSR and Agency RMBS. Our objective is to deliver more stable performance, relative to RMBS portfolios without MSR, across changing market environments, and we are acutely focused on creating sustainable stockholder value over the long term.
Previous wording
Matrix holds the requisite approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent a contractual right to control the servicing of a mortgage loan, the obligation to service the loan in accordance with applicable laws and requirements and the right to collect a fee for the performance of servicing activities, such as collecting principal and interest from a borrower and distributing those payments to the owner of the loan. We acquire MSR from high-quality originators through flow and bulk purchases. On October 1, 2023, we began directly servicing the majority of the mortgage loans underlying our MSR through our newly acquired subsidiary, RoundPoint. We also contract with appropriately licensed third-party subservicers to handle servicing functions in the name of the subservicer for a portion of the loans underlying our MSR, although we expect our use of third-party subservicers will decline to minimal levels in 2024 as we continue to transfer the servicing of our MSR portfolio to RoundPoint. As the servicer of record on our MSR portfolio, we remain accountable to the GSEs for all servicing matters and, accordingly, provide substantial oversight of each of our subservicers. We believe MSR are a natural fit for our portfolio over the long term. Our MSR business leverages our core competencies in prepayment and interest rate risk analytics and the MSR assets may provide offsetting risks to our Agency RMBS, hedging both interest rate and mortgage spread risk.
Current wording
One of our wholly owned subsidiaries, TH MSR Holdings LLC (formerly Matrix Financial Services Corporation) holds the requisite approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent a contractual right to control the servicing of a mortgage loan, the obligation to service the loan in accordance with applicable laws and requirements and the right to collect a fee for the performance of servicing activities, such as collecting principal and interest from a borrower and distributing those payments to the owner of the loan. TH MSR Holdings acquires MSR from third-party originators through flow and bulk purchases, as well as through the recapture of MSR on loans in its MSR portfolio that refinance. Beginning in 2024, TH MSR Holdings also acquires MSR on loans originated by its subsidiary, RoundPoint, through purchases and recapture of MSR. TH MSR Holdings does not directly service mortgage loans; instead, it engages its wholly owned subsidiary, RoundPoint, to handle substantially all servicing functions for the mortgage loans underlying our MSR. Our MSR business leverages our core competencies in prepayment and interest rate risk analytics, and the MSR assets may provide offsetting risks to our Agency RMBS, hedging both interest rate and mortgage spread risk.
Previous wording
Our Agency RMBS portfolio is comprised primarily of fixed rate mortgage-backed securities backed by single-family and multi-family mortgage loans. All of our principal and interest Agency RMBS are Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations, or Ginnie Mae mortgage pass-through certificates, which are backed by the guarantee of the U.S. government. The majority of these securities consist of whole pools in which we own all of the investment interests in the securities.
Current wording
Our Agency RMBS portfolio is comprised primarily of fixed rate mortgage-backed securities backed by single-family and multi-family mortgage loans. All of our principal and interest Agency RMBS are Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations, or Ginnie Mae mortgage pass-through certificates, which are backed by the guarantee of the U.S. government. The majority of our Agency RMBS portfolio is comprised of whole pool certificates.
Previous wording
We seek to deploy moderate leverage as part of our investment strategy. We generally finance our Agency RMBS through short- and long-term borrowings structured as repurchase agreements. We also finance our MSR through revolving credit facilities, repurchase agreements, term notes payable and convertible senior notes.
Current wording
We seek to deploy moderate leverage as part of our investment strategy. We generally finance our Agency RMBS through short- and long-term borrowings structured as repurchase agreements. We also finance our MSR through revolving credit facilities, repurchase agreements and convertible senior notes. Additionally, we finance our origination of mortgage loans through warehouse facilities.
Previous wording
We have elected to be treated as a REIT for U.S. federal income tax purposes. To qualify as a REIT we are required to meet certain investment and operating tests and annual distribution requirements. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders, do not participate in prohibited transactions and maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated certain of our subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Code, to engage in such activities. We also operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act. Certain of our subsidiaries have obtained the requisite licenses and approvals to own and manage MSR and to originate and directly service residential mortgage loans.
Current wording
We have elected to be treated as a REIT for U.S. federal income tax purposes. To qualify as a REIT we are required to meet certain investment and operating tests and annual distribution requirements. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders, do not participate in prohibited transactions and maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated certain of our subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Internal Revenue Code, to engage in such activities. We also operate our business in a manner that will permit us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the 1940 Act. Certain of our subsidiaries have obtained the requisite licenses and approvals to own and manage MSR and to originate and directly service residential mortgage loans.
Previous wording
Our net interest income includes income from our securities portfolio, including the amortization of purchase premiums and accretion of purchase discounts. Net interest income, as well as our servicing income, net of servicing costs, will fluctuate primarily as a result of changes in market interest rates, our financing costs and prepayment speeds on our assets. Interest rates, financing costs and prepayment rates vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty.
Current wording
Our net interest income includes income from our securities portfolio, including the amortization of purchase premiums and accretion of purchase discounts, and mortgage loans held-for-sale. Net interest income, as well as our servicing income, net of servicing costs, will fluctuate primarily as a result of changes in market interest rates, our financing costs and prepayment speeds on our assets. Interest rates, financing costs and prepayment rates vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty.
Previous wording
A significant portion of our assets and liabilities are reported at fair value and, therefore, our consolidated balance sheets and statements of comprehensive loss are significantly affected by fluctuations in market prices. At December 31, 2023, approximately 87.3% of our total assets, or $11.5 billion, consisted of financial instruments recorded at fair value. See Note 11 -Fair Value to the consolidated financial statements, included in this Annual Report on Form 10-K, for descriptions of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized. Although we execute various hedging strategies to mitigate our exposure to changes in fair value, we cannot fully eliminate our exposure to volatility caused by fluctuations in market prices.
Current wording
A significant portion of our assets and liabilities are reported at fair value and, therefore, our consolidated balance sheets and statements of comprehensive income (loss) are significantly affected by fluctuations in market prices. At December 31, 2024, approximately 85.0% of our total assets, or $10.4 billion, consisted of financial instruments recorded at fair value. See Note 12 -Fair Value to the consolidated financial statements, included in this Annual Report on Form 10-K, for descriptions of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized. Although we execute various hedging strategies to mitigate our exposure to changes in fair value, we cannot fully eliminate our exposure to volatility caused by fluctuations in market prices.
Previous wording
Any temporary change in the fair value of our AFS securities, excluding certain AFS securities for which we have elected the fair value option, is recorded as a component of accumulated other comprehensive loss and does not impact our reported income (loss) for U.S. GAAP purposes, or GAAP net income (loss). However, changes in the provision for credit losses on AFS securities are recognized immediately in GAAP net income (loss). Our GAAP net income (loss) is also affected by fluctuations in market prices on the remainder of our financial assets and liabilities recorded at fair value, including interest rate swap, cap and swaption agreements and certain other derivative instruments (i.e., Agency to-be-announced securities, or TBAs, options on TBAs, futures, options on futures, and inverse interest-only securities), which are accounted for as derivative trading instruments under U.S. GAAP, fair value option elected AFS securities and MSR.
Current wording
Any temporary change in the fair value of our AFS securities, excluding certain AFS securities for which we have elected the fair value option, is recorded as a component of accumulated other comprehensive loss and does not impact our reported income (loss) for U.S. GAAP purposes, or GAAP net income (loss). However, changes in the provision for credit losses on AFS securities are recognized immediately in GAAP net income (loss). Our GAAP net income (loss) is also affected by fluctuations in market prices on the remainder of our financial assets and liabilities recorded at fair value, including interest rate swap and swaption agreements and certain other derivative instruments (i.e., Agency to-be-announced securities, or TBAs, options on TBAs, futures, options on futures, inverse interest-only securities, interest rate lock commitments and forward loan sale commitments), which are accounted for as derivative trading instruments under U.S. GAAP, fair value option elected AFS securities, MSR and mortgage loans held-for-sale.
Previous wording
We have numerous internal controls in place to help ensure the appropriateness of fair value measurements. Significant fair value measures are subject to detailed analytics and management review and approval. Our entire investment portfolio reported at fair value is priced by third-party brokers and/or by independent pricing vendors. We generally receive three or more broker and vendor quotes on pass-through Agency P&I RMBS, and generally receive multiple broker or vendor quotes on all other securities, including interest-only Agency RMBS, and inverse interest-only Agency RMBS and other Agency securities. We also receive multiple vendor quotes for the MSR in our investment portfolio. For Agency securities, the third-party pricing vendors and brokers use pricing models that commonly incorporate such factors as coupons, primary and secondary mortgage rates, rate reset periods, issuer, prepayment speeds, credit enhancements and expected life of the security. For MSR, vendors use pricing models that generally incorporate observable inputs such as principal balance, note rate, geographical location, loan-to-value (LTV) ratios, FICO, appraised value and other loan characteristics, along with observed market yields and trading levels. Pricing vendors will customarily incorporate servicing fee, ancillary income, and earnings rate on escrow as observable inputs. Unobservable or model-driven inputs include forecast per loan annual cost to service, forecast cumulative defaults, default curve, forecast loss severity and forecast voluntary prepayment.
Current wording
Our entire Agency RMBS investment portfolio reported at fair value is priced by third-party brokers and/or by independent pricing vendors. We generally receive three or more broker and vendor quotes on pass-through Agency P&I RMBS, and generally receive multiple broker or vendor quotes on all other securities, including interest-only and inverse interest-only Agency RMBS. For Agency RMBS, the third-party pricing vendors and brokers use pricing models that commonly incorporate such factors as coupons, primary and secondary mortgage rates, rate reset periods, issuer, prepayment speeds, credit enhancements and expected life of the security.
Previous wording
We evaluate the prices we receive from both third-party brokers and pricing vendors by comparing those prices to actual purchase and sale transactions, our internally modeled prices calculated based on market observable rates and credit spreads, and to each other both in current and prior periods. We review and may challenge valuations from third-party brokers and pricing vendors to ensure that such quotes and valuations are indicative of fair value as a result of this analysis. We then estimate the fair value of each security based upon the median of the final broker quotes received, and we estimate the fair value of MSR based upon the average of prices received from third-party vendors, subject to internally-established hierarchy and override procedures.
Current wording
We evaluate the prices we receive from both third-party brokers and pricing vendors by comparing those prices to actual purchase and sale transactions, our internally modeled prices calculated based on market observable rates and credit spreads, and to each other both in current and prior periods. We review and may challenge valuations from third-party brokers and pricing vendors to ensure that such quotes and valuations are indicative of fair value as a result of this analysis. We then estimate the fair value of each security based upon the median of the final broker quotes received, subject to internally-established hierarchy and override procedures.
Previous wording
We utilize “bid side” pricing for our Agency securities and, as a result, certain assets, especially the most recent purchases, may realize a markdown due to the “bid-offer” spread. To the extent that this occurs on available-for-sale securities not accounted for under the fair value option, any economic effect of this would be reflected in accumulated other comprehensive loss.
Current wording
We utilize “bid side” pricing for our Agency RMBS and, as a result, certain assets, especially the most recent purchases, may realize a markdown due to the “bid-offer” spread. To the extent that this occurs on available-for-sale securities not accounted for under the fair value option, any economic effect of this would be reflected in accumulated other comprehensive loss.
Previous wording
Considerable judgment is used in forming conclusions and estimating inputs to our Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayments speeds, credit losses and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, there is no assurance that our estimates of fair value are indicative of the amounts that would be realized on the ultimate sale or exchange of these assets. At December 31, 2023, 23.3% of our total assets were classified as Level 3 fair value assets.
Current wording
Considerable judgment is used in forming conclusions and estimating inputs to our Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayments speeds, credit losses and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, there is no assurance that our estimates of fair value are indicative of the amounts that would be realized on the ultimate sale or exchange of these assets. At December 31, 2024, 24.6% of our total assets were classified as Level 3 fair value assets.
Previous wording
Our portfolio is subject to market risks, primarily interest rate risk and prepayment risk. We seek to offset a portion of our Agency pool market value exposure through our MSR and interest-only Agency RMBS portfolios. During periods of decreasing interest rates with rising prepayment speeds, the market value of our Agency pools generally increases and the market value of our interest-only securities and MSR generally decreases. The inverse relationship occurs when interest rates rise and prepayments fall. Average prepayment speeds for our portfolio decreased from the prior quarter due to mortgage rates and weaker seasonal factors. In addition to changes in interest rates, changes in home price performance, key employment metrics and government programs, among other macroeconomic factors, can affect prepayment speeds. We believe our active portfolio management approach, including our asset selection process, positions us to respond to a variety of market scenarios. Although we are unable to predict future interest rate movements, our strategy of pairing Agency RMBS with MSR, with a focus on managing various associated risks, including interest rate, prepayment, credit, mortgage spread and financing risk, is intended to generate stable performance with a low level of sensitivity to changes in the yield curve, prepayments and interest rate cycles.
Current wording
Our portfolio is subject to market risks, primarily interest rate risk and prepayment risk. We pair our MSR and interest-only Agency RMBS portfolio with a portion of our Agency pool portfolio to offset risk. During periods of decreasing interest rates with rising prepayment speeds, the market value of our Agency pools generally increases and the market value of our interest-only securities and MSR generally decreases. The inverse relationship occurs when interest rates rise and prepayments fall. Prepayment rates for the MSR portfolio declined to 4.9% over the fourth quarter of 2024, which is consistent with the universe of mortgage loans with similar coupon rates. Housing turnover rates tend to be slower in the fall and winter months due to school schedules, holidays and colder weather. In addition to changes in interest rates, changes in home price performance, key employment metrics and government programs, among other macroeconomic factors, can affect prepayment speeds. We believe our active portfolio management approach, including our asset selection process, positions us to respond to a variety of market scenarios. Although we are unable to predict future interest rate movements, our strategy of pairing MSR with Agency RMBS, with a focus on managing various associated risks, including interest rate, prepayment, credit, mortgage spread and financing risk, is intended to generate stable performance, relative to RMBS portfolios without MSR, with a low level of sensitivity to changes in the yield curve, prepayments and interest rate cycles.
Previous wording
Our MSR portfolio offers attractive spreads and has many risk reducing characteristics when paired with our Agency RMBS portfolio. The following table summarizes activity related to the unpaid principal balance, or UPB, of loans underlying our MSR portfolio for the three months ended December 31, 2023, and the four immediately preceding quarters:
Current wording
Our MSR portfolio offers attractive spreads and has many risk reducing characteristics when paired with our Agency RMBS portfolio. The following table summarizes activity related to the UPB of loans underlying our MSR portfolio for the three months ended December 31, 2024, and the four immediately preceding quarters:
Previous wording
As of December 31, 2023, we had entered into repurchase agreements with 37 counterparties, 19 of which had outstanding balances. In addition, we held short- and long-term borrowings under revolving credit facilities, term notes payable and unsecured convertible senior notes. As of December 31, 2023, the debt-to-equity ratio funding our Agency and non-Agency investment securities, MSR and servicing advances, which includes unsecured borrowings under convertible senior notes, was 4.5:1.0.
Current wording
As of December 31, 2024, we had entered into repurchase agreements with 36 counterparties, 19 of which had outstanding balances. In addition, we held short- and long-term borrowings under revolving credit facilities, warehouse facilities and unsecured convertible senior notes. As of December 31, 2024, the debt-to-equity ratio funding our Agency and non-Agency investment securities, MSR and related servicing advances and mortgage loans held-for-sale, which includes unsecured borrowings under convertible senior notes, was 4.3:1.0.
Previous wording
As of December 31, 2023, we held $729.7 million in cash and cash equivalents, approximately $1.1 million of unpledged Agency securities and $3.8 million of unpledged non-Agency securities. As a result, we had an overall estimated unused borrowing capacity on our unpledged securities of approximately $3.2 million. As of December 31, 2023, we held approximately $4.1 million of unpledged MSR and $63.5 million of unpledged servicing advances. Overall, on December 31, 2023, we had $167.9 million unused committed and $423.3 million unused uncommitted borrowing capacity on MSR financing facilities, and $165.7 million in unused committed borrowing capacity on servicing advance financing facilities. Generally, unused borrowing capacity may be the result of our election not to utilize certain financing, as well as delays in the timing in which funding is provided, insufficient collateral or the inability to meet lenders’ eligibility requirements for specific types of asset classes.
Current wording
As of December 31, 2024, we held $504.6 million in cash and cash equivalents, approximately $5.4 million of unpledged Agency RMBS and $3.4 million of unpledged non-Agency securities. As a result, we had an overall estimated unused borrowing capacity on our unpledged securities of approximately $6.5 million. As of December 31, 2024, we held approximately $5.2 million of unpledged MSR and $22.9 million of unpledged servicing advances. Overall, on December 31, 2024, we had $70.1 million unused committed and $795.0 million unused uncommitted borrowing capacity on MSR financing facilities, and $59.7 million in unused committed borrowing capacity on servicing advance financing facilities. As of December 31, 2024, all of our mortgage loans were pledged for financing and we had $30.9 million unused committed borrowing capacity on our warehouse facilities. Generally, unused borrowing capacity may be the result of our election not to utilize certain financing, as well as delays in the timing in which funding is provided, insufficient collateral or the inability to meet lenders’ eligibility requirements for specific types of asset classes.
Previous wording
Our book value per common share for U.S. GAAP purposes was $15.21 at December 31, 2023, a decrease from $15.36 per common share at September 30, 2023, and a decrease from $17.72 per common share at December 31, 2022. The decline in book value for both the three and twelve months ended December 31, 2023 was primarily driven by net widening of mortgage spreads and dividends declared, offset by net unrealized gains recognized on AFS securities.
Current wording
Our book value per common share for U.S. GAAP purposes was $14.47 at December 31, 2024, a decrease from $14.93 per common share at September 30, 2024, and a decrease from $15.21 per common share at December 31, 2023. The decline in book value for both the three and twelve months ended December 31, 2024 was primarily driven by unrealized losses recognized on AFS securities and dividends declared, partially offset by net servicing income earned. Our comprehensive loss attributable to common stockholders was $1.6 million and comprehensive income attributable to common stockholders was $107.6 million for the three and twelve months ended December 31, 2024, respectively, as compared to comprehensive income attributable to common stockholders of $38.9 million and comprehensive loss attributable to common stockholders of $49.7 million for the three and twelve months ended December 31, 2023, respectively.
Previous wording
Interest income increased from $99.3 million and $295.5 million for the three and twelve months ended December 31, 2022, respectively, to $122.4 million and $480.4 million for the same periods in 2023 due to an increase in Agency RMBS portfolio size, lower amortization recognized on Agency RMBS due to lower unamortized premium, and higher interest on cash balances as a result of the higher interest rate environment.
Current wording
Interest income decreased from $122.4 million and $480.4 million for the three and twelve months ended December 31, 2023, respectively, to $103.8 million and $450.2 million for the same periods in 2024 due to a decrease in Agency RMBS portfolio size and lower average cash balances held throughout the periods.
Previous wording
Interest expense increased from $115.6 million and $258.4 million for the three and twelve months ended December 31, 2022, respectively, to $168.1 million and $643.2 million for the same periods in 2023. The increase in interest expense for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022, was primarily due to increases in interest rates and higher borrowing balances on both AFS securities and MSR, offset by lower borrowing balances on convertible senior notes.
Current wording
Interest expense decreased from $168.1 million and $643.2 million for the three and twelve months ended December 31, 2023 to $138.7 million and $607.8 million for the same periods in 2024 due to lower borrowing balances on both AFS securities and MSR, partially offset by increases in interest rates throughout the first half of 2024.
Previous wording
(1)Average asset balance represents average amortized cost on AFS securities and average unpaid principal balance on other assets.
Current wording
(1)Average asset balance represents average amortized cost on AFS securities and average unpaid principal balance on mortgage loans held-for-sale and reverse repurchase agreements.
Previous wording
(2)Yields on Agency Derivatives not shown as interest income is included in (loss) gain on other derivative instruments in the consolidated statements of comprehensive loss.
Current wording
(2)Yields on Agency Derivatives not shown as interest income is included in (loss) gain on other derivative instruments in the consolidated statements of comprehensive income (loss).
Previous wording
The increase in yields on AFS securities for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022 was driven by net purchases of higher coupon AFS securities with lower unamortized premiums. The increase in cost of funds associated with the financing of AFS securities for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022, was due to rising interest rates.
Current wording
The increase in yields on AFS securities for the three and twelve months ended December 31, 2024, as compared to the same periods in 2023 was driven by net purchases of higher coupon AFS securities with lower unamortized premiums. The decrease in cost of funds associated with the financing of AFS securities for the three months ended December 31, 2024, as compared to the same period in 2023, was due to declining interest rates. The increase in cost of funds associated with the financing of AFS securities for the year ended December 31, 2024, as compared to the same period in 2023, was due to rising interest rates throughout the first half of 2024.
Previous wording
The increase in yields on reverse repurchase agreements for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022, was the result of rising interest rates. However, for the year ended December 31, 2023 and the three and twelve months ended December 31, 2022, these yields were offset by the cost of financing the associated repurchase agreements collateralized by U.S. Treasury securities. We did not hold any repurchase agreements collateralized by U.S. Treasury securities during the three months ended December 31, 2023.
Current wording
The decrease in yields on reverse repurchase agreements for the three months ended December 31, 2024, as compared to the same period in 2023, was due to declining interest rates. The increase in yields on reverse repurchase agreements for the year ended December 31, 2024, as compared to the same period in 2023, was the result of rising interest rates throughout the first half of 2024. However, for the year ended December 31, 2023, these yields were offset by the cost of financing the associated repurchase agreements collateralized by U.S. Treasury securities. We did not hold any repurchase agreements collateralized by U.S. Treasury securities during the three and twelve months ended December 31, 2024 or the three months ended December 31, 2023.
Previous wording
The increase in cost of funds associated with the financing of MSR assets and related servicing advance obligations for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022, was due to rising interest rates and an increase in the use of revolving credit facilities and repurchase agreement financing, which on average carry higher floating rate spreads than term notes. Additionally, during the year ended December 31, 2023, we repurchased $104.2 million principal amount of our outstanding MSR term notes in open market transactions. These repurchased MSR term note bonds were then financed via existing master repurchase agreements. We have one revolving credit facility in place to finance our servicing advance obligations, which are included in other assets on our consolidated balance sheets.
Current wording
The decrease in cost of funds associated with the financing of MSR assets and related servicing advance obligations for the three months ended December 31, 2024, as compared to the same period in 2023, was primarily due to declining interest rates, as well as a greater portion of our MSR financing from repurchase agreements versus revolving credit facilities. Our repurchase agreements, on average, carry lower floating rate spreads than our revolving credit facilities. The increase in cost of funds associated with the financing of MSR assets and related servicing advance obligations for the year ended December 31, 2024, as compared to the same period in 2023, was the result of rising interest rates throughout the first half of 2024. We have one revolving credit facility in place to finance our servicing advance obligations, which are included in other assets on our consolidated balance sheets.
Previous wording
The slight increase in cost of funds associated with our convertible senior notes for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022, was due to lower amortization of deferred debt issuance costs during the year ended December 31, 2022 as a result of the maturity of our convertible senior notes due 2022 in January 2022.
Current wording
The cost of funds associated with our convertible senior notes for the three and twelve months ended December 31, 2024, as compared to the same periods in 2023, was consistent.
Previous wording
The following tables present the components of the yield earned on our AFS securities portfolio as a percentage of our average amortized cost of securities for the three and twelve months ended December 31, 2023 and 2022:
Current wording
The following table presents the components of the yield earned on our AFS securities portfolio as a percentage of our average amortized cost of securities for the three and twelve months ended December 31, 2024 and 2023:
Previous wording
The increase in servicing income for the three and twelve months ended December 31, 2023, as compared to the same periods in 2022, was primarily due to higher float income as a result of the higher interest rate environment and lower compensating interest as a result of lower prepayment rates.
Current wording
The decrease in total servicing income for the three months ended December 31, 2024, as compared to the same period in 2023, was primarily due to lower servicing fee income on a smaller MSR portfolio as a result of sales and runoff, partially offset by higher ancillary and other fee income as a result of the acquisition of RoundPoint. The decrease in total servicing income for the year ended December 31, 2024, as compared to the same period in 2023, was primarily due lower servicing fee income on a smaller MSR portfolio as a result of sales and runoff, partially offset by higher float income as a result of the higher interest rate environment and higher ancillary and other fee income as a result of the acquisition of RoundPoint.
Previous wording
The following table presents the components of (loss) gain on servicing asset for the three and twelve months ended December 31, 2023 and 2022:
Current wording
The following table presents the components of gain (loss) on servicing asset for the three and twelve months ended December 31, 2024 and 2023:
Previous wording
(1)During the year ended December 31, 2023, excess MSR was transferred to Agency-sponsored trusts in exchange for stripped mortgage backed securities, or SMBS. In each transaction, a portion of the SMBS was acquired by third parties, and we acquired the remaining balance of those SMBS, which are included within Agency AFS securities unless sold prior to December 31, 2023.
Current wording
(1)During the year ended December 31, 2023, excess MSR was transferred to Agency-sponsored trusts in exchange for stripped mortgage backed securities, or SMBS. In each transaction, a portion of the SMBS was acquired by third parties, and we acquired the remaining balance of those SMBS, which were briefly included within Agency AFS securities until their sale in the same year.
Previous wording
The increase in loss on servicing asset for the three months ended December 31, 2023, as compared to the same period in 2022, was driven by higher unfavorable change in valuation assumptions used in the fair valuation of MSR and losses realized on sales of MSR, offset by lower portfolio runoff. The increase in loss (decrease in gain) on servicing asset for the year ended December 31, 2023, as compared to the same period in 2022, was driven by lower favorable change in valuation assumptions used in the fair valuation of MSR, offset by lower portfolio runoff and gains on sales of excess MSR.
Current wording
The increase in gain (decrease in loss) on servicing asset for the three and twelve months ended December 31, 2024, as compared to the same periods in 2023, was driven by favorable change in valuation inputs and assumptions used in the fair valuation of MSR and higher realized gains on sales of MSR, partially offset by slightly higher portfolio run-off.
Previous wording
(Loss) Gain On Interest Rate Swap And Swaption Agreements
Current wording
Gain (Loss) On Interest Rate Swap And Swaption Agreements
Previous wording
Net interest spread recognized for the accrual and/or settlement of the net interest expense associated with our interest rate swaps results from receiving either a floating interest rate (OIS or SOFR) or a fixed interest rate and paying either a fixed interest rate or a floating interest rate (OIS or SOFR) on positions held to economically hedge/mitigate portfolio interest rate exposure (or duration) risk. We may elect to terminate certain swaps and swaptions to align with our investment portfolio, agreements may mature or options may expire resulting in full settlement of our net interest spread asset/liability and the recognition of realized gains and losses, including early termination penalties. The change in fair value of interest rate swaps and swaptions during the three and twelve months ended December 31, 2023 and 2022 was a result of changes to floating interest rates (OIS or SOFR), the swap curve and corresponding counterparty borrowing rates. Since swaps and swaptions are used for purposes of hedging our interest rate exposure, their unrealized valuation gains and losses (excluding the reversal of unrealized gains and losses to realized gains and losses upon termination, maturation or option expiration) are generally offset by unrealized losses and gains in our Agency RMBS AFS portfolio, which are recorded either directly to stockholders’ equity through other comprehensive income (loss) or to loss on investment securities, in the case of certain AFS securities for which we have elected the fair value option.
Current wording
Net interest spread recognized for the accrual and/or settlement of the net interest expense associated with our interest rate swaps results from receiving either a floating interest rate (OIS or SOFR) or a fixed interest rate and paying either a fixed interest rate or a floating interest rate (OIS or SOFR) on positions held to economically hedge/mitigate portfolio interest rate exposure (or duration) risk. We may elect to terminate certain swaps and swaptions to align with our investment portfolio, agreements may mature or options may expire resulting in full settlement of our net interest spread asset/liability and the recognition of realized gains and losses, including early termination penalties. The change in fair value of interest rate swaps and swaptions during the three and twelve months ended December 31, 2024 and 2023 was a result of changes to floating interest rates (OIS or SOFR), the swap curve and corresponding counterparty borrowing rates. Swaps and swaptions are used for purposes of hedging our interest rate exposure, and therefore, their unrealized valuation gains and losses (excluding the reversal of unrealized gains and losses to realized gains and losses upon termination, maturation or option expiration) generally offset a portion of the unrealized losses and gains recognized on our Agency RMBS AFS portfolio, which are recorded either directly to stockholders’ equity through other comprehensive (loss) income or to loss on investment securities, in the case of certain AFS securities for which we have elected the fair value option.
Previous wording
(1)Certain operating expenses predominantly consists of expenses incurred in connection with the Company’s ongoing litigation with PRCM Advisers LLC, as discussed within Note 16 to the consolidated financial statements, included under Item 1 of this Annual Report on Form 10-K. It also includes certain transaction expenses incurred in connection with the Company’s acquisition of RoundPoint.
Current wording
(1)Certain operating expenses predominantly consists of expenses incurred in connection with the Company’s ongoing litigation with PRCM Advisers, as discussed within Note 18 to the consolidated financial statements, included under Item 1 of this Annual Report on Form 10-K. It also includes certain transaction expenses incurred in connection with the Company’s acquisition of RoundPoint.
Previous wording
The increase in total operating expenses during the three months ended December 31, 2023, as compared to the same period in 2022, was driven by the addition of RoundPoint’s compensation, benefits, operating and loan level expenses, offset by lower expenses incurred in connection with the Company’s ongoing litigation with PRCM Advisers LLC. The increase in total operating expenses during the year ended December 31, 2023, as compared to the same period in 2022, was driven by the addition of RoundPoint’s compensation, benefits, operating and loan level expenses, as well as higher expenses incurred in connection with the Company’s ongoing litigation with PRCM Advisers LLC.
Current wording
The decrease in total operating expenses during the three months ended December 31, 2024, as compared to the same period in 2023, was driven by lower expenses incurred in connection with the Company’s ongoing litigation with PRCM Advisers as well as operational efficiencies implemented throughout 2024, partially offset by slightly higher compensation and benefits expenses. The increase in total operating expenses during the year ended December 31, 2024, as compared to the same period in 2023, was driven by the addition of RoundPoint’s compensation, benefits, operating and loan level expenses, partially offset by lower expenses incurred in connection with the Company’s ongoing litigation with PRCM Advisers. Prior to the acquisition of RoundPoint, we did not directly service mortgage loans; instead, we contracted with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the mortgage loans underlying our MSR. These third-party subservicing costs and other servicing expenses directly related to our MSR portfolio are included within the servicing costs line item on our consolidated statements of comprehensive income (loss). Post-acquisition, all servicing-related expenses incurred by RoundPoint are included within the other operating expenses line item on our consolidated statements of comprehensive income (loss).
Previous wording
During the three months ended December 31, 2023, we recognized a benefit from income taxes of $29.3 million, which was primarily due to net losses recognized on MSR and operating expenses, offset by net income from MSR servicing activities in our TRSs. During the year ended December 31, 2023, we recognized a provision for income taxes of $23.0 million, which was primarily due to net income from MSR servicing activities, offset by net losses recognized on MSR and operating expenses in our TRSs. During the three and twelve months ended December 31, 2022, we recognized a provision for income taxes of $8.5 million and $104.2 million, respectively. The provision recognized for the three months ended December 31, 2022 was primarily due to income from MSR servicing activities and net gains recognized on derivative instruments, offset by net losses recognized on MSR and operating expenses in our TRSs. The provision recognized for the year ended December 31, 2022 was primarily due to income from MSR servicing activities and net gains recognized on MSR, offset by net losses recognized on derivative instruments and operating expenses in our TRSs.
Current wording
During the three and twelve months ended December 31, 2024, we recognized a provision for income taxes of $30.9 million and $46.6 million, respectively. The provision recognized for the three months ended December 31, 2024 was primarily due to net income from MSR servicing and mortgage loan origination activities and net gains recognized on MSR, partially offset by operating expenses incurred in our TRSs. The provision recognized for the year ended December 31, 2024 was primarily due to net income from MSR servicing and mortgage loan origination activities, partially offset by operating expenses incurred in our TRSs. During the three and twelve months ended December 31, 2023, we recognized a benefit from income taxes of $29.3 million and a provision for income taxes of $23.0 million, respectively. The benefit recognized for the three months ended December 31, 2023 was primarily due to net losses recognized on MSR and operating expenses, partially offset by net income from MSR servicing activities in our TRSs. The provision recognized during the year ended December 31, 2023 was primarily due to net income from MSR servicing activities, partially offset by net losses recognized on MSR and operating expenses in our TRSs.
Previous wording
With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities, excluding certain AFS securities for which we have elected the fair value option and securities with an allowance for credit losses, do not impact our GAAP net (loss) income or taxable income but are recognized on our consolidated balance sheets as a change in stockholders’ equity under “accumulated other comprehensive loss.” For the three and twelve months ended December 31, 2023, net unrealized gains on AFS securities recognized as other comprehensive income were $405.9 million and net unrealized losses on AFS securities recognized as other comprehensive loss were $38.6 million, respectively. Additionally, we reclassify unrealized gains and losses on AFS securities in accumulated other comprehensive loss to net (loss) income upon the recognition of any realized gains and losses on sales as individual securities are sold. For the three and twelve months ended December 31, 2023, we reclassified $77.6 million and $140.9 million, respectively, in unrealized losses on sold AFS securities from accumulated other comprehensive loss to (loss) gain on investment securities on the consolidated statements of comprehensive loss.
Current wording
With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities, excluding certain AFS securities for which we have elected the fair value option and securities with an allowance for credit losses, are recorded directly to stockholders’ equity through other comprehensive (loss) income. Additionally, we reclassify unrealized gains and losses on AFS securities in accumulated other comprehensive loss to net income (loss) upon the recognition of any realized gains and losses on sales as individual securities are sold. Fluctuations in other comprehensive (loss) income are driven by changes in fair value assumptions and the reclassification of unrealized gains and losses to realized gains and losses upon sale.
Previous wording
The majority of our AFS investment securities portfolio is comprised of fixed rate Agency mortgage-backed securities backed by single-family and multi-family mortgage loans. We also hold $4.2 million in tranches of mortgage-backed and asset-backed P&I and interest-only non-Agency securities. All of our P&I Agency RMBS AFS are Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations, or Ginnie Mae mortgage pass-through certificates, which are backed by the guarantee of the U.S. government. The majority of these securities consist of whole pools in which we own all of the investment interests in the securities.
Current wording
The majority of our AFS investment securities portfolio is comprised of fixed rate Agency mortgage-backed securities backed by single-family and multi-family mortgage loans. We also hold $3.7 million in tranches of mortgage-backed and asset-backed P&I and interest-only non-Agency securities. All of our P&I Agency RMBS AFS are Fannie Mae or Freddie Mac mortgage pass-through certificates or collateralized mortgage obligations, or Ginnie Mae mortgage pass-through certificates, which are backed by the guarantee of the U.S. government. The majority of our Agency RMBS portfolio is comprised of whole pool certificates.
Previous wording
The tables below summarizes certain characteristics of our Agency RMBS AFS at December 31, 2023 and December 31, 2022:
Current wording
The tables below summarize certain characteristics of our Agency RMBS AFS at December 31, 2024 and December 31, 2023:
Previous wording
One of our wholly owned subsidiaries, Matrix, has approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent the right to control the servicing of residential mortgage loans. Matrix acquires MSR from third-party originators through flow and bulk purchases but does not directly service mortgage loans; instead, it contracts with appropriately licensed subservicers to handle substantially all servicing functions in the name of the subservicer for the mortgage loans underlying the Company’s MSR. On October 1, 2023, we, through our newly acquired subsidiary RoundPoint, began directly servicing a portion of the mortgage loans underlying our MSR portfolio as well as servicing mortgage loans underlying MSR owned by third parties. RoundPoint has approvals from Fannie Mae and Freddie Mac to service residential mortgage loans. As of December 31, 2023 and December 31, 2022, our MSR had a fair market value of $3.1 billion and $3.0 billion, respectively.
Current wording
One of our wholly owned subsidiaries, TH MSR Holdings, has approvals from Fannie Mae and Freddie Mac to own and manage MSR, which represent the right to control the servicing of residential mortgage loans. TH MSR Holdings acquires MSR from third-party originators through flow and bulk purchases, as well as through the recapture of MSR on loans in its MSR portfolio that refinance. Beginning in 2024, TH MSR Holdings also acquires MSR on loans originated by its subsidiary, RoundPoint, through purchases and recapture of MSR. As of December 31, 2024 and December 31, 2023, our MSR had a fair market value of $3.0 billion and $3.1 billion, respectively.
Previous wording
As of December 31, 2023 and December 31, 2022, our MSR portfolio included MSR on 848,264 and 809,025 loans with an unpaid principal balance of approximately $215.6 billion and $204.9 billion, respectively. The following tables summarize certain characteristics of the loans underlying our MSR by gross weighted average coupon rate types and ranges at December 31, 2023 and December 31, 2022:
Current wording
As of December 31, 2024 and December 31, 2023, our MSR portfolio included MSR on 803,091 and 848,264 loans with an unpaid principal balance of approximately $200.3 billion and $215.6 billion, respectively. The following tables summarize certain characteristics of the loans underlying our MSR by gross weighted average coupon rate types and ranges at December 31, 2024 and December 31, 2023:
Showing the first 40 of 68 pairs. Open the source sections for the rest.
Rearranged current paragraphs (1)
Current report — wording carried from elsewhere
We have numerous internal controls in place to help ensure the appropriateness of fair value measurements. Significant fair value measures are subject to detailed analytics and management review and approval.
Rearranged previous paragraphs (2)
Previous report — wording carried elsewhere
We seek to leverage our core competencies of understanding and managing interest rate and prepayment risk to invest in our portfolio of MSR and Agency RMBS. Our objective is to deliver stable performance across changing market environments, and we are acutely focused on creating sustainable stockholder value over the long term.
Previous report — wording carried elsewhere
(Loss) Gain On Other Derivative Instruments