UWM sues Two Harbors for $500 million after $603 million loss

UWM Holdings sued Two Harbors Investment Corp in federal court Monday, seeking more than $500 million after a failed $1.3 billion acquisition triggered a $603 million loss tied to interest-rate hedges.

"They shouldn't have presumed they would get Two Harbors," Bose George, an analyst at Keefe, Bruyette & Woods, said. He said CEO Mat Ishbia likely stuck with the pursuit "partly because he didn't want to lose."

UWM agreed in December to acquire Two Harbors, a mortgage-servicing real estate investment trust, for about $1.3 billion in stock. The deal collapsed in March when Two Harbors chose a cash offer from CrossCountry Mortgage at $12 per share, rejecting UWM's raised bid of $12.50. UWM had purchased interest-rate hedges anticipating the acquisition, but never acquired the portfolio they were designed to cover. The hedge loss contributed to a $451.9 million net loss in the latest quarter and forced UWM to suspend its common-stock dividend.

The fallout extends beyond the courtroom. UWM secured a $1.5 billion preferred-stock infusion from Oaktree Capital Management, which gains two board seats, veto rights over senior management changes and a guaranteed return of at least $600 million. Oaktree could take majority control of the board if UWM misses required dividend payments. Shares have fallen about 70 percent year-to-date, cutting the company's valuation from roughly $16 billion at its 2021 SPAC debut to about $2 billion.

Oaktree's $1.5 Billion Infusion Reshapes UWM's Capital Structure

Ishbia, who controls 79 percent of UWM's voting power through a special class of stock, had to give up significant control to secure the Oaktree deal. The investment firm receives warrants for additional shares and a 10 percent cash dividend on its preferred stock, with a repayment penalty that escalates annually. If UWM repays Oaktree in the third year, it would owe the $150 million annual dividend twice plus a 30 percent penalty of $450 million on top of the $1.5 billion principal.

Ishbia's family holding company is injecting $150 million and will forgo common-stock dividends that have historically paid billions to the majority owner. The company also agreed to a 10-year, $115 million sponsorship deal with Ishbia in 2025 to name the Phoenix arena where his NBA and WNBA teams play. Ishbia purchased the Phoenix Suns for $4 billion in cash in 2023, and UWM's headquarters campus is leased from entities controlled by Ishbia and his father, costing the company $21 million last year.

Lawsuit Adds Uncertainty as Mortgage Rates Stay Elevated

UWM said it had "exhausted every reasonable alternative" before filing the lawsuit, which alleges breach of contract and fraud. Two Harbors did not respond to a request for comment. The litigation adds another layer of uncertainty to a company already navigating elevated mortgage rates that have kept refinancing volumes depressed across the industry.

The Oaktree deal's structure means common shareholders face a longer recovery timeline. The preferred stock's 10 percent dividend requirement and escalating repayment penalties take priority over any future common-stock distributions. UWM's core mortgage origination business remained profitable underneath the Q2 loss, but the over-hedged derivatives and the preferred raise have pushed any meaningful return of capital to common shareholders further out.

The failed Two Harbors pursuit echoes broader challenges in the mortgage sector, where persistent high rates have squeezed margins across the industry. Rocket Mortgage, UWM's largest competitor, has also faced pressure as refinancing activity remains muted. UWM's aggressive expansion strategy under Ishbia, which included growing market share even as rivals pulled back, now faces the test of whether the Oaktree partnership can stabilize the balance sheet.

If UWM successfully recovers damages from Two Harbors, the proceeds could accelerate the preferred paydown and shorten the timeline to restoring common-stock dividends. If the lawsuit fails, the company faces years of servicing the Oaktree preferred obligations before common shareholders see any return.

Shares of UWM closed Monday at $1.41, up 10.16 percent, and were unchanged in Tuesday premarket trading. The stock has lost roughly 70 percent of its value this year.

This article is for informational purposes only and does not constitute investment advice.