A New York-based real estate investment trust Two Harbors hired industry veteran Kyle Kilpatrick to lead a newly formed mortgage origination division, part of the company’s strategy to keep borrowers out of its servicing portfolio when interest rates fall.
“He has experience building direct-to-consumer channel products and businesses from the ground up,” Bill Greenberg, president and CEO of Two Harbors, said in an interview. “We’re building a team to handle all of those functions so we can do the lending, and as we said, hopefully sometime in the second quarter we start getting locks.”
Kilpatrick, a 30-year veteran of the mortgage industry, started as executive vice president of originations at Two Harbors in November. Before that, he spent about a year as EVP of direct lending Go for a mortgage and served as president of Direct Consumers for eight years Lending.coma America’s finances company.
“Given where our portfolio is and where interest rates are, we have this opportunity to build something from scratch and we can completely tailor it to our business,” Greenberg said. “We don’t have to buy something that other people make that doesn’t fit as well and is overpriced.”
Two Harbors’ origination business will hedge its $216 billion servicing portfolio in outstanding principal balance (UPB) as of December 31, 2023. This is how things work at other mortgage companies. Mr. Cooper, Rhythm Capital and Pennymac. Two Harbors’ main strategy is not to compete with the big players for new customers.
“A lot of these guys spend a lot of money on advertising and helping people find borrowers that they can refinance or refinance with,” Greenberg said. “We have borrowers we know very well that we can just call. “The generation of lead is already a prisoner of our ecosystem.”
For now, most of the company’s borrowers are reluctant to refinance. The weighted average coupon rate for its servicing portfolio was 3.45% in the fourth quarter, indicating low prepayment risk. Meanwhile, the 30-year fixed mortgage rate was 6.9% as of Thursday afternoon. HousingWire’s Center for Mortgage Rates.
Although rates are still high, Two Harbors will work with second mortgage and home equity products through its origination business.
Journey to sourced loans
Two Harbors was created in the wake of the Great Recession in 2009 as the prices of most assets, including mortgage-backed securities (MBS), began to fall and became an investment opportunity.
The company began investing in agency and legacy subprime MBS. Over time, it became involved in other asset classes such as single-family rental and commercial real estate lending. (The latter division later became a REIT).
Mortgage servicing rights (MSRs) became a target in 2013, and through 2020 the company chose to focus on agency MSRs and agency MBS. According to Greenberg, the original premise was that “diversification only sounded good in theory” because “investors wanted to diversify themselves, but they didn’t want their investment vehicles to diversify for them.”
Between 2017 and 2018, the company crossed the mark of 500,000 service units. At this level, conventional wisdom says in-house services are most cost-effective, Greenberg says. At that time, Iki Liman was looking for a platform to acquire. It made its debut in the service business by purchasing in October 2023 RoundPoint Mortgage Servicing LLC.
“One of the most interesting features of Roundpoint was that it was an agency [MSR] only. He had no civil service, no Ginny Mae Exposure that has different regulatory risks and different economics,” Greenberg said.
“It also didn’t have a lot of services on the platform – it was servicing some of the assets of the parent company that were going to be re-parented before being transferred to us,” he said. “So he had a small amount of actual third-party subservience. It was kind of an empty shell waiting for someone to come along and put all their services on the platform.”
Two Ports also wanted to ensure that any vehicle it purchased was licensed to lend. It became clear to executives that recapture economics should be included in the valuation of MSRs.
“This has been known for a long time, but until the last few years it was never included in the cash flow of mortgage servicing,” Greenberg said. “And so we knew that some amount of repossession capabilities would be critical to our efforts to get the most out of our service asset.”
After the integration with Roundpoint, Two Harbors is expected to have 500 employees in four offices in New York, Minnesota, South Carolina and Texas.