Two Harbors Responds To UWM Lawsuit; Ishbia Reassures Brokers

Two Harbors Investment Corp. has answered UWM’s more than $500 million lawsuit with a competing account of why their merger failed and who bears responsibility for the financial fallout.

In a statement Tuesday, Two Harbors disputed UWM’s breach-of-contract and fraud allegations while questioning the wholesale lender’s hedge strategy, financial disclosures, and ability to complete an acquisition.

By Wednesday morning, UWM Chairman and CEO Mat Ishbia was delivering a different message directly to thousands of brokers and sales employees.

“UWM has never been stronger than we are today,” Ishbia said.

The exchange shows the dispute moving beyond the merger agreement. Two Harbors is using UWM’s recently disclosed $603.2 million derivatives loss to question how the wholesale lender managed the transaction. Ishbia is trying to separate that loss and UWMC’s falling stock price from the strength of UWM’s mortgage operation.

Two Harbors Responds To UWM’s Claims

UWM Holdings Corp. and UWM Acquisitions 1 LLC sued Two Harbors in federal court Monday, alleging breach of contract and fraud.

UWM contends Two Harbors deliberately undermined their original $1.3 billion merger, impeded efforts to secure shareholder approval, and positioned the company for a competing acquisition by CrossCountry Mortgage.

UWM is seeking more than $500 million based on alleged lost profits, expected synergies, foregone capital efficiencies, and costs associated with pursuing the transaction. Those allegations have not been proven in court.

Two Harbors called the lawsuit “frivolous,” “meritless,” and “illogical” in a statement released Tuesday. 

Its response focused heavily on UWM’s $603.2 million derivatives loss.

UWM has said it established an unusually large interest-rate hedge in anticipation of acquiring Two Harbors and its mortgage servicing rights portfolio. When the acquisition did not close, UWM was left over-hedged relative to the servicing assets it owned.

The loss contributed to UWM’s $451.9 million second-quarter net loss. Total equity fell to $985.3 million as of June 30, down from approximately $1.6 billion three months earlier, according to the company’s second-quarter results.

Two Harbors argues that the size of the hedge reflects a decision made by UWM, not damage caused by the REIT.

Two Harbors Questions The Size Of The Hedge

Two Harbors said UWM’s hedge was approximately 13 times the total interest-rate exposure of its MSR portfolio, even if the portfolio had been entirely unhedged.

The REIT also said its portfolio was already hedged, was never owned by UWM, and was under a binding agreement to be sold to CrossCountry.

That 13-times calculation is Two Harbors’ assertion. It has not been independently established or tested in court, and UWM did not provide that comparison when explaining the loss.

Ishbia acknowledged during UWM’s second-quarter earnings call that the company had “over-hedged” based on the Two Harbors transaction it expected to complete. He described the loss as specific to the failed transaction and said UWM does not expect to repeat the mistake.

UWM produced $39.7 billion in mortgages during the second quarter, generated $185.9 million in adjusted EBITDA, and improved its total gain margin to 133 basis points.

Those operating results were overshadowed by the derivatives loss and the capital restructuring announced alongside them.

UWM closed a $1.65 billion preferred investment from Oaktree Capital Management and an Ishbia family investment vehicle. The company also announced plans for a rights offering of up to $400 million, if needed, and suspended its common-stock dividend.

Fitch Ratings subsequently downgraded UWM’s long-term issuer default rating to B+, with a stable outlook. Fitch treated the $1.65 billion preferred investment as debt in its leverage analysis.

Disclosure Questions Could Enter The Case

Two Harbors also questioned when UWM knew the magnitude of the derivatives loss and how that information intersected with its continued pursuit of the REIT.

The company said the loss had been rumored since May 19 but was not publicly disclosed until UWM reported its second-quarter results in August. Two Harbors suggested that, if the lawsuit reaches discovery, communications involving UWM, Mizuho Bank, and Oaktree could provide more information about UWM’s financial position and representations that it had the intent, financing, and ability to complete a transaction.

Two Harbors has not established that UWM violated any disclosure obligation. Its statements represent one side of pending litigation.

The two sides are framing different questions. UWM wants the court to examine whether Two Harbors improperly undermined a binding merger agreement. Two Harbors wants scrutiny placed on UWM’s management of the financial exposure attached to the expected acquisition.

A costly hedging decision would not, by itself, disprove UWM’s claims. Proof that Two Harbors breached the agreement would not automatically make it responsible for every loss UWM associated with the transaction.

The Deal Lost Shareholder Support

UWM and Two Harbors announced their original stock-for-stock merger in December. Under the agreement, Two Harbors shareholders would receive 2.3328 UWMC shares for each Two Harbors share they owned.

By the scheduled March vote, the value of UWMC stock had fallen substantially. Two Harbors said the consideration was approximately 20% below its book value at that point.

The transaction failed to secure sufficient shareholder support, and the March 16 meeting was adjourned.

UWM’s complaint alleges that Two Harbors contributed to the failure by mischaracterizing its shareholder base and obstructing direct outreach to retail investors. UWM said holders of 43.85% of outstanding Two Harbors shares had voted for the transaction, representing 69.62% of votes cast at that point.

Two Harbors attributes the outcome to the falling value of UWMC stock and governance concerns. It noted that proxy advisory firm Institutional Shareholder Services recommended against the UWM transaction.

The original agreement was terminated March 27, when Two Harbors accepted CrossCountry’s initial $10.80-per-share cash offer. CrossCountry agreed to cover the $25.4 million termination fee owed to UWM.

Both bidders later increased their proposals. UWM ultimately offered $12.50 per share to investors electing cash, with UWMC stock available as an alternative. CrossCountry increased its offer to $12 per share in cash plus a prorated stub dividend.

Two Harbors shareholders approved the CrossCountry transaction July 2. The company said Tuesday that the acquisition is awaiting one final state regulatory approval and remains expected to close in August.

Ishbia Tells Brokers UWM Is “Doing Excellent”

After Two Harbors released its response, Ishbia addressed the recent coverage in a LinkedIn post accompanying remarks from UWM’s weekly meeting.

“I know a lot of people are talking about UWM in the news lately, so I gave my perspective to thousands of our clients and Sales team in our weekly meeting this morning,” Ishbia wrote. “My quick take is that UWM is doing excellent and continues to be the best mortgage company in America, and will continue to grow/win with our brokers.”

In the accompanying video, Ishbia said UWM is stronger now than when it entered the public market at a $16 billion valuation.

“UWM has never been stronger than we are today,” Ishbia said. “Never, even when we went public at a $16 billion valuation.”

He said UWM has never been stronger across artificial intelligence, technology, operations, sales, the broker channel, capital, and liquidity.

“At the end of the day, what matters is the company is as strong as it’s ever been,” Ishbia said. “Our company’s doing as good as it’s ever been.”

Ishbia also argued that UWMC’s share price should not be treated as a direct measure of UWM’s operating strength. UWMC shares closed at $1.20 on Aug. 6 after falling 34.78% following the release of UWM’s results, capital plan, and dividend suspension.

He warned brokers that competitors could use the stock decline and recent coverage to recruit their originators and influence relationships with real estate agents.

“Everybody is trying to use it against you,” Ishbia said, offering examples of what competitors might say: “The biggest wholesale lender is struggling. Their stock price is $1.50.”

“You’ve doubled your market share in the last five years,” Ishbia told brokers. “You think retail loves that?”

His remarks did not address the litigation or Two Harbors’ 13-times hedge calculation directly. The message instead focused on assuring brokers that UWM remains strong enough to continue investing in the wholesale channel.

What It Means For Originators

For originators using UWM, neither the lawsuit nor Two Harbors’ response changes a loan program, rate sheet, or underwriting process.

The practical issue is whether the derivatives loss and new capital structure eventually affect pricing, service, staffing, technology investment, or broker support. UWM says it will continue investing in each of those areas.

UWM’s second-quarter production and adjusted EBITDA show that its origination operation continues to generate substantial volume and operating earnings. Its new capital provides additional resources, but the preferred investment carries a significant cost, the common dividend has been suspended, and Fitch now evaluates UWM at a lower credit rating.

Competing lenders and retail recruiters do not need to prove UWM is financially impaired to capitalize on uncertainty around the company. They need only persuade broker owners, originators, or referral partners that the uncertainty creates risk.

That explains why Ishbia took the message directly to brokers.

The lawsuit will determine whether Two Harbors bears legal responsibility for the collapse of the original merger. Originators will make a more immediate judgment based on what they can see: pricing, turn times, product access, account executive support, and UWM’s willingness to keep investing in wholesale.