Two Harbors REIT Countersues UWM Over Hedging Bet

Two Harbors Investment Corp., a real estate investment trust (REIT), has filed a countersuit against United Wholesale Mortgage (UWM) seeking the return of a $25.4 million breakup fee. The REIT alleges that UWM breached the terms of their previously agreed-upon merger agreement. This legal action follows UWM's lawsuit filed in February, which accused Two Harbors of attempting to terminate their merger agreement without proper cause. Two Harbors' countersuit, filed in the U.S. District Court for the Eastern District of Michigan, contends that UWM's actions, particularly its alleged "hedging bet," violated the merger pact and led to the termination of the deal. The REIT is demanding the return of the $25.4 million breakup fee it paid to UWM, arguing that the fee should be forfeited by UWM due to its alleged breaches.

In its own lawsuit, UWM had claimed that Two Harbors was using market volatility as a pretext to exit the merger. UWM's initial complaint stated that Two Harbors had "unilaterally and improperly" sought to terminate the merger agreement. The original agreement, announced in January 2023, was valued at approximately $1 billion. UWM, a prominent mortgage lender, and Two Harbors, which invests in mortgage-related assets, had intended to combine their operations. The termination of the merger agreement has now escalated into a legal battle, with both parties accusing each other of contractual violations. Two Harbors' countersuit specifically targets UWM's alleged "hedging bet," which the REIT claims was a speculative financial maneuver undertaken by UWM that went against the spirit and letter of their merger agreement. This bet, according to Two Harbors, exposed the combined entity to undue risk and constituted a material breach.

The dispute centers on the interpretation of the merger agreement and the circumstances surrounding its dissolution. Two Harbors asserts that UWM's alleged hedging activities created a situation where the merger was no longer in the best interest of Two Harbors' shareholders, justifying its termination. The REIT's legal filing aims to recover the substantial breakup fee, which was intended as compensation to UWM in the event of a termination under specific conditions. By suing for the return of this fee, Two Harbors is signaling its intent to prove that UWM was the party at fault for the deal's collapse. The outcome of this litigation could have significant implications for both companies, impacting their financial standing and future strategic decisions. The legal proceedings are expected to delve into the specifics of the merger agreement's clauses related to market conditions, hedging strategies, and termination provisions. The court will need to determine whether UWM's actions constituted a material breach of the agreement, thereby entitling Two Harbors to the return of its breakup fee.