UWM Holdings Corp (NYSE:UWMC), the parent of United Wholesale Mortgage, sued Two Harbors Investment Corp. (NYSE:TWO) in federal court Monday, seeking more than $500 million after a failed acquisition left the mortgage lender with a $603 million loss tied to interest-rate hedges.
The Wall Street Journal reported Tuesday that UWM alleges Two Harbors breached its contract and sabotaged their planned merger. UWM had agreed in December to acquire Two Harbors, a real estate investment trust focused on mortgage servicing, for about $1.3 billion in stock. The deal fell apart in March after Two Harbors chose a cash offer from another buyer.
How The Deal Led To A $603 Million Loss
UWM had taken on interest-rate hedges in anticipation of acquiring Two Harbors’ mortgage portfolio. The hedges were designed to protect against changes in interest rates, but UWM ultimately never acquired the portfolio they were intended to cover.
The failed deal followed an aggressive pursuit by UWM. In May, the company raised its offer for Two Harbors to $12.50 per share, topping CrossCountry Mortgage’s pending $12-per-share offer. Two Harbors’ board ultimately backed the CrossCountry transaction.
The hedge position became a major problem as mortgage rates remained elevated. UWM recorded the $603 million loss in its latest quarter, contributing to a $451.9 million net loss and the suspension of its common-stock dividend.
"They shouldn’t have presumed" they would get Two Harbors, Keefe, Bruyette & Woods analyst Bose George said, according to the Journal. He added that UWM CEO Mat Ishbia may have continued pursuing the deal "partly because he didn’t want to lose."
Two Harbors did not immediately respond to Benzinga’s request for comment.
UWM Takes Two Harbors To Court
UWM said it had "exhausted every reasonable alternative" before filing the lawsuit and is seeking more than $500 million in damages.
UWM also secured a $1.5 billion investment from Oaktree Capital Management. The deal gives Oaktree two seats on UWM’s board, veto rights over certain changes to senior management and the company’s bylaws, warrants for additional shares and a guaranteed return of at least $600 million.
Oaktree could eventually gain majority control of UWM’s board if the company fails to pay required dividends. Ishbia currently controls 79% of UWM’s voting power through a special class of stock.
Ishbia’s family holding company is also investing $150 million in UWM and will give up common-stock dividends that have historically paid billions of dollars to the family.
UWM shares have fallen sharply following the loss and financing announcement. The company, which was valued at about $16 billion when it went public in 2021, now has a valuation of around $2 billion.
Price Action: Shares of UWM Holdings closed Monday at $1.41, up 10.16%. The stock was unchanged at $1.41 in Tuesday’s premarket trading.
Benzinga Edge Stock Rankings show negative price trends across the short-, medium- and long-term time frames.
Disclaimer: This content was produced with the help of AI tools and was reviewed and published by Benzinga editors.
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