The fight over Two Harbors Investment Corp. did not end when shareholders approved its sale to CrossCountry Mortgage.
Now United Wholesale Mortgage wants damages.
UWM Holdings Corp. and UWM Acquisitions 1 LLC sued Two Harbors in federal court Monday, seeking more than $500 million and alleging breach of contract and fraud in connection with the collapse of the companies’ original $1.3 billion merger.
The lawsuit lands just days after UWM disclosed how expensive that collapse became.
Last week, UWM reported a $603.2 million derivatives loss tied largely to a hedge established around the anticipated Two Harbors acquisition. The loss contributed to a $451.9 million second-quarter net loss and came alongside a $2.05 billion capital plan, a suspended dividend, and plans to reduce debt and MSR financing.
The new lawsuit attempts to shift part of the Two Harbors story from a failed M&A bet to an alleged contractual wrong.
UWM contends Two Harbors deliberately undermined the transaction it had agreed to complete while positioning itself for a competing deal with CrossCountry Mortgage.
Those are allegations and have not been proven in court.
CrossCountry Mortgage declined to comment on the lawsuit when contacted by NMP. NMP also reached out to Two Harbors for comment.
UWM Says The Deal Was Undermined
UWM and Two Harbors announced their original deal in December. Under the agreement, UWM would acquire the mortgage servicing rights-focused real estate investment trust in an all-stock transaction valued at approximately $1.3 billion at announcement.
The deal would have given UWM control of RoundPoint Mortgage Servicing and substantially expanded its mortgage servicing portfolio.
The strategic value of RoundPoint is also evident in how CrossCountry is financing its own acquisition. Fitch Ratings said Monday it expects to assign a BB- rating to $500 million of senior unsecured notes CrossCountry plans to issue, with proceeds expected to repay secured borrowings used to fund the Two Harbors transaction.
Fitch said the acquisition should strengthen CrossCountry’s business profile by expanding its servicing portfolio and allowing it to bring more profitable servicing in-house through RoundPoint. But it also increases leverage: Fitch estimates total leverage will rise to 5.3x from 4.0x, while corporate leverage will increase to 2.4x from 1.2x on a pro forma basis.
That 2.4x corporate leverage level exceeds Fitch’s 1.5x downgrade trigger, although the ratings agency expects retained earnings to reduce leverage over the medium term.
The financing underscores how valuable Two Harbors — and particularly RoundPoint’s servicing platform — was to both bidders: UWM built a large hedge around the portfolio it expected to acquire, while CrossCountry is taking on additional leverage to complete the purchase.
But the transaction began unraveling by March.
Two Harbors postponed the March 16 shareholder meeting after the UWM deal failed to secure enough votes for approval. Later that month, Two Harbors determined that an offer from CrossCountry constituted a superior proposal.
On March 27, Two Harbors terminated its agreement with UWM and accepted CrossCountry’s $10.80-per-share cash offer. CrossCountry agreed to cover the $25.4 million termination fee owed to UWM.
UWM did not walk away.
Instead, the wholesale lender repeatedly raised its offer and mounted an unusually public campaign against the CrossCountry transaction. Its proposal eventually reached $12.50 per share for shareholders electing cash, while retaining an option for UWMC stock.
CrossCountry ultimately increased its offer to $12 per share in cash plus a prorated stub dividend.
Two Harbors shareholders approved the CrossCountry transaction July 2.
The transaction had been expected to close Aug. 3, but both Two Harbors and Fitch continued Monday to describe the acquisition as expected to close in August, subject to remaining closing conditions.
The Lawsuit Goes Beyond Losing A Bidding War
UWM’s complaint does not simply argue that Two Harbors found another buyer.
It alleges Two Harbors breached obligations under the original merger agreement and interfered with efforts to obtain shareholder approval while pursuing CrossCountry.
Among its claims, UWM alleges Two Harbors misrepresented the composition of its shareholder base, delayed information needed for direct shareholder outreach, and impeded UWM’s efforts to reach investors ahead of the March vote.
UWM also alleges Two Harbors CEO William Greenberg encouraged CrossCountry to make a competing offer during a period when the original merger agreement contained nonsolicitation restrictions.
The complaint further argues that Two Harbors management had financial incentives to prefer a cash transaction with CrossCountry, including executive benefits and equity awards that could be paid or accelerated at closing.
Again, those claims represent UWM’s account of events and have not been adjudicated.
Two Harbors consistently defended its decision-making during the months-long bidding war. The company argued that CrossCountry offered greater certainty through an all-cash, fully financed transaction and raised concerns about the declining value of UWMC stock, UWM's proposed consideration structure, and execution risk.
Questions About The Process Predated UWM's Lawsuit
UWM is also not the first party to challenge how the Two Harbors board handled the CrossCountry transaction.
In May, a Two Harbors shareholder filed an amended federal class-action complaint accusing Two Harbors and its directors of issuing misleading proxy disclosures and breaching fiduciary duties in connection with the CrossCountry vote.
As NMP reported during the shareholder battle, that lawsuit questioned whether investors had been given enough information to evaluate the board's recommendation while UWM was publicly offering more cash per share.
The shareholder lawsuit and UWM's new case are separate proceedings with different plaintiffs and legal claims. The earlier case does not establish that UWM's allegations are true.
But it does establish something important about the timeline: scrutiny of the Two Harbors sale process existed well before UWM disclosed its second-quarter hedge loss.
A $25.4M Breakup Fee May Not End The Argument
The original UWM merger agreement provided for a $25.4 million termination fee, which CrossCountry agreed to pay after Two Harbors walked away from the UWM transaction.
UWM is now seeking substantially more.
Its lawsuit argues that the contractual cap does not protect Two Harbors from greater liability if UWM proves willful breach or intentional fraud.
UWM is seeking more than $500 million in damages based on alleged lost profits, expected synergies, foregone capital efficiencies, and costs associated with pursuing the transaction.
Whether it can recover any of that will depend on the contract, evidence developed through litigation, and ultimately the court.
That distinction matters because UWM's newly disclosed $603.2 million derivatives loss should not simply be treated as the amount the lender is trying to recover in court.
The two numbers are connected by the same failed acquisition, but they are not interchangeable.
UWM has said it expanded its interest-rate hedge in anticipation of acquiring Two Harbors and its large MSR portfolio. When the acquisition failed to happen, UWM was left over-hedged relative to the servicing assets it actually owned.
CEO Mat Ishbia acknowledged on last week's earnings call that the hedge was built around the expected Two Harbors acquisition and signaled that litigation was coming.
The Bigger Issue For Brokers
For brokers, nothing about Monday's lawsuit changes UWM's wholesale operations or loan programs.
The significance is what the failed acquisition has already done to the financial structure of the industry's dominant wholesale lender.
UWM produced $39.7 billion in mortgages during the second quarter and generated $185.9 million in adjusted EBITDA. But after the derivatives loss and other results, total equity fell to $985.3 million at June 30, while non-funding debt stood at $6.04 billion.
UWM responded with a capital plan that includes $1.65 billion in preferred equity from Oaktree Capital Management and the Ishbia family, plus a planned $400 million rights offering, if needed.
The company has said the money will primarily be used to pay down debt and MSR financing while it continues investing in brokers, technology, AI, products, and in-house servicing.
That is why this lawsuit matters beyond the courtroom.
UWM spent months pursuing a servicing platform it considered strategically important. It hedged around the MSRs it expected to acquire. The deal collapsed. The hedge produced a $603.2 million loss. UWM then brought in expensive new capital to reset its balance sheet.
Now it is asking a federal court to decide whether Two Harbors bears financial responsibility for the way that deal came apart.
The acquisition may have failed, but UWM clearly isn't finished with it.
