UWM NYSE: UWMC said it generated more than $180 million in adjusted EBITDA and approximately $40 billion of business during the second quarter, while outlining a proposed capital partnership with Oaktree and plans to suspend its regular dividend.
During a shareholder question-and-answer session, company leadership said the Oaktree transaction is intended to strengthen UWM’s balance sheet, add strategic mortgage-market expertise and position the company for what it expects to be a stronger housing and mortgage environment in the coming years.
Oaktree Partnership and Capital Raise
UWM described Oaktree as more than a source of capital, citing the firm’s experience in mortgage servicing rights, non-agency mortgage markets and capital markets. UWM said Oaktree shares its view of the independent mortgage broker channel and the infrastructure UWM has built to support brokers.
The company said the transaction represents a capital raise of more than $2 billion, including a $1.5 billion investment from Oaktree and a commitment of up to $550 million from UWM’s largest shareholder. UWM said the capital raise would increase total equity to roughly $3 billion.
Management said the transaction would reduce its non-funding debt-to-equity ratio to about 1.2 times from more than 5 times at the end of the second quarter, when it said the ratio reached approximately 5.6 times following hedge-related losses. UWM said the expected 1.2-times ratio would be below what it characterized as industry norms of roughly 1.5 to 2 times.
UWM said it chose preferred equity with warrants rather than a large common-stock issuance because issuing common shares at prevailing trading levels would have created immediate dilution. The company acknowledged that the warrants would be dilutive if exercised, but said it viewed the structure as balancing capital needs with long-term shareholder upside.
- UWM said 165 million warrants have an exercise price of $2 per share.
- Another 165 million warrants have an exercise price of $6 per share.
- The company said the average warrant exercise price is about $4 per share.
Management said Oaktree’s preferred investment carries a 10% coupon. It also said the capital transaction is expected to reduce interest expense by roughly $100 million through the repayment of MSR-related lines and other obligations, though the preferred dividend expense means the financing is not simply an interest-cost reduction.
Dividend Suspension and Balance Sheet Focus
UWM said it is suspending its dividend to retain equity and earnings following the capital raise. Management framed the decision as one of capital allocation, saying liquidity and equity are priorities as the company seeks to expand its business and improve leverage metrics.
The company said it would continue to assess dividends with its board each quarter and could consider special dividends or a return to regular dividends in the future. For now, it said, the focus is on building capital and taking advantage of future mortgage-market opportunities.
Management said the mortgage market has been difficult for four to five years, but maintained that UWM has remained profitable and has consistently generated operating income. The company said it expects mortgage conditions over the next four to five years to be “significantly better,” though it did not provide a financial outlook.
Two Harbors Transaction and Hedge Loss
UWM said a failed transaction involving Two Harbors was a factor in its decision to raise capital and in a hedge loss during the second quarter. Management said the company had anticipated acquiring a substantially larger mortgage servicing rights portfolio through the transaction, which would have roughly doubled the MSR book it had historically managed.
To protect against the additional MSR exposure, UWM put on a hedge. Management said market events, including increases in the 10-year rate, combined with the termination of the Two Harbors transaction and UWM’s equity position at the time, contributed to the loss.
The company said it removed the hedge after reaching an internal risk threshold and characterized the event as transaction-specific rather than reflective of its operating business. UWM said it does not traditionally hedge its MSR portfolio because it views loan originations and MSR values as a natural offset: lower rates may reduce MSR values but can also increase originations, while higher rates can increase MSR values while reducing loan volume.
UWM said it expects to pursue litigation involving Two Harbors and CrossCountry Mortgage over what it described as inappropriate actions related to the proposed deal, but did not provide further details.
Servicing and Originations Strategy
Management said UWM does not intend to become a servicing-focused company and remains primarily an originator serving the broker channel. The company said it has brought servicing in-house, while continuing to incur costs associated with both internal servicing and its external servicing relationship with Cenlar, as well as offboarding costs.
UWM said those overlapping servicing costs are affecting current expenses and that it expects benefits from the internal platform next year. It said it will continue to build its servicing portfolio but may sell MSRs opportunistically when pricing and strategy warrant.
The company said its in-house servicing capabilities could improve borrower retention and increase the likelihood that refinances return through its broker network. Management said UWM accounts for roughly 12% to 13% of all refinances despite holding only about 2% to 3% of servicing.
If rates decline sharply, UWM said it would expect an MSR write-down but also substantially greater originations. Management said its origination platform could handle annualized volume of $250 billion to $300 billion or more and said lower rates could lead to quarterly originations of $60 billion to $80 billion.
UWM said the Oaktree partnership, higher equity base and continued investments in technology and artificial intelligence leave the company better positioned to serve mortgage brokers and pursue long-term growth.
About UWM (NYSE:UWMC)
United Wholesale Mortgage NYSE: UWMC is a leading mortgage lender in the United States specializing in the wholesale channel. The company partners with independent mortgage brokers, community banks and credit unions to offer a full suite of residential mortgage products. Through its network of third-party originators, United Wholesale Mortgage underwrites, funds and closes loans, allowing its partners to focus on customer acquisition and service.
The company’s product offerings include conventional fixed- and adjustable-rate mortgages, Federal Housing Administration (FHA) loans, Veterans Affairs (VA) loans, U.S.
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