UWM Holdings Faces Class-Action Lawsuit Over Hedging Strategy

UWM Holdings Corp. is facing a proposed class-action lawsuit filed by a shareholder who alleges the wholesale mortgage lender misled investors regarding its hedging strategy, which was reportedly altered in anticipation of a failed bid for Two Harbors Investment Corp. The lawsuit, filed last week in the U.S. District Court for the Eastern District of Michigan, claims that UWM deviated from its customary hedging approach and engaged in "over-hedging" in preparation for the acquisition of Two Harbors. This alleged shift in strategy purportedly introduced "excess hedging risk" that contradicted the company's public disclosures about its business operations and future prospects. The complaint states that as a consequence of the defendants' alleged wrongful actions and omissions, and the subsequent sharp decline in the market value of UWM's securities, the plaintiff and other class members have incurred substantial losses and damages.

Named as defendants in the suit are UWM Holdings Corp. itself, along with key executives including Chairman, President, and CEO Mat Ishbia, and Chief Financial Officer Rami Hasani. The plaintiff contends that while UWM's public filings acknowledged the occasional use of hedges to mitigate risks within its mortgage servicing rights (MSR) portfolio, and indicated the company held $27.5 billion in notional "other interest rate derivatives," it failed to disclose an over-hedged position specifically linked to the potential Two Harbors transaction. This hedging exposure became apparent when UWM reported a significant net loss of $451.9 million for the second quarter. This loss was largely attributed to a $603.2 million loss on interest rate derivatives, contributing to a 43.6% year-over-year decrease in equity.

During the company's earnings call on August 5, Mat Ishbia acknowledged the situation, stating to analysts that UWM "were over-hedged, if you think of it that way, protecting against the Two Harbors transaction." Following the earnings release and the subsequent conference call, UWM's stock price experienced a notable decline, falling by $0.64, or 34.78%, to close at $1.20 on August 6. This price drop occurred on unusually high trading volume, indicating significant market reaction to the disclosed financial results and the hedging strategy revelations. The lawsuit, filed under the Securities Exchange Act of 1934, seeks to hold UWM and its executives accountable for these alleged misrepresentations and the resulting financial harm to investors. A spokesperson for UWM had not immediately responded to requests for comment from HousingWire at the time of reporting.