Two Harbors fires back at UWM, calling lawsuit frivolous

Two Harbors Investment is fighting fire with fire, calling the lawsuit filed by UWM Holdings Corp. over their failed merger "frivolous" and saying its misgivings regarding the Pontiac, Michigan-based company have "been thoroughly vindicated."

UWM filed its case in the U.S. District Court of Maryland, alleging willful breach of contract and fraud, seeking to recover more than $500 million in damages as a result.

In the filing, UWM accused Two Harbor executives William Greenberg and Rebecca Sandberg of engaging in a "stealth mission" to get the deal canceled, "driven by pride, greed and self-interest."

How Two Harbors responded to UWM's allegations

Two Harbors called those allegations false, describing them as a part of UWM's "familiar refrain" to blame others.

"As UWMC well knows, its stock-for-stock merger failed to secure shareholder support for several reasons, none of them having anything to do with TWO and starting with Mat Ishbia's disastrous fourth-quarter earnings call on Feb. 25," the statement said. "At the time of the scheduled March 2026 shareholder vote on the UWMC all-stock transaction, UWMC stock had declined so much that the value to TWO shareholders was approximately 20% below its book value."

The UWM lawsuit shows how Two Harbors breached a binding merger agreement, a company spokesperson said in a statement.

“Two Harbors’ statement does not deny the facts set forth in the complaint and instead resorts t finger pointing about later events that have nothing to do with Two Harbors’ willful breaches and fraud,” the UWM spokesperson said.

The company is confident in its case and ultimately this will be decided in court.

In the second quarter, the parent of United Wholesale Mortgage lost $451.9 million because of a mark-to-market hit it stated was related to a hedge position made in anticipation of acquiring the Two Harbors mortgage servicing rights portfolio.

"The lawsuit filed by UWMC is frivolous and raises serious questions about UWMC's public disclosures," a press release from Two Harbors said. The company's previously expressed concerns over UWM's intent and/or ability to close on their transaction has now been vindicated, the REIT also said.

Two Harbors also referred to the precipitous decline in UWM's stock price. The all-stock compensation, which remained unchanged throughout the process, called for 2.3328 shares of UWM to be exchanged for each share of Two Harbors. UWM did eventually make a cash alternative offer, the last one priced at $12.50 per share, while the accepted CrossCountry bid was for $12 per share.

On Dec. 16, before the deal was announced, UWM closed at $5.12 per share. At the start of the year, the stock traded at $4.41.

But UWM's stock price kept dropping, to a low of 93 cents per share on Aug. 6. Since then, the price has regained some ground, closing at $1.53 per share on Aug. 11.

UWM's capital infusion

When UWM announced its results on Aug. 5, it also disclosed a $2.05 billion capital infusion from Oaktree Capital Management along with an entity controlled by the Ishbia family.

UWM also suspended its dividend. Prior to the earnings release, analysts were expecting some sort of reduction in what was a 10 cent per share payment because of high leverage levels.

"The loss highlights the dire condition of UWMC's balance sheet, liquidity and also casts doubt on its risk management and other governance practices," Two Harbors said.

The REIT even questioned the hedge loss, stating UWM wants investors to believe it was related to a risk position 13 times the total interest rate exposure of those MSRs if they were unhedged; UWM "knew full well" this wasn't the case.

The Two Harbors statement also made reference to past comments from UWM, which labeled the real estate investment trust "a melting ice cube."

It pointed to a statement in the second quarter earnings call from Mat Ishbia, UWM's chairman, president and CEO, calling Oaktree a better partner for his company than a Two Harbors transaction over the long-term.

CrossCountry debt offering priced

Meanwhile, CrossCountry's acquisition of Two Harbors, originally set to close on Aug. 3, remains on hold as the parties await final regulatory approval.

A debt offering related to the transaction has been upsized and priced, CrossCountry announced on Aug. 11.

Fitch previously rated the deal at a speculative grade BB-(EXP). At the time of the report, plans were for $500 million in senior unsecured notes to be sold.

Now, the deal consists of $750 million of debt priced at a 7.75% interest rate. The notes are due in 2031.

It is now expected to close on or about Aug. 13.

Proceeds will be used to repay some of the outstanding balance on CrossCountry's MSR facility. The Fitch report said CrossCountry is drawing on the line as part of its payment to Two Harbors.

KBW meets with UWM investor relations

On Aug. 11, analysts from Keefe, Bruyette & Woods met with UWM's investor relations department.

Regarding the preferred shares issued to Oaktree, those have a 10% coupon and a 10% liquidation preference. This makes their effective cost 20%, a flash note on the meeting from Bose George said.

"However, management reiterated that since the preferred shares can be prepaid after year 2 without any penalty, the life of these securities could be relatively short, so the drag on earnings should be temporary."

If UWM's stock price rises above $2 and a rights offering connected with the investment is successful, it would reduce the level of preferred equity needed and could also be used to redeem some of those shares, the company told George.

"The warrants that Oaktree received are priced at $2 and $6," George continued. "Cashless exercise is not permitted, so to the extent shares go above that level and the warrants are exercised, this would create extra common equity for the company that can be used to pay down the preferred shares, which would be a positive longer-term outcome."