The mortgage industry is bracing for another significant consolidation as CrossCountry Mortgage has reached an agreement to acquire Two Harbors Investment Corp., a real estate investment trust (REIT). The deal, announced today, marks a shift in strategy for Two Harbors, which had previously been set to merge with UWM Holdings, a competing mortgage lender. This CrossCountry Mortgage acquisition signals a broader trend of realignment within the mortgage market as companies navigate higher interest rates and fluctuating volumes.
The move comes after Two Harbors terminated its earlier agreement with UWM Holdings, a decision prompted by what the company described as the inability to obtain the necessary regulatory approvals in a timely manner. The proposed merger with UWM, announced in June 2023, faced scrutiny from regulators concerned about potential antitrust implications, particularly regarding market concentration in the wholesale mortgage lending space. The termination fee paid to UWM was $25 million, according to a filing with the Securities and Exchange Commission.
CrossCountry Mortgage’s offer provides a more certain path forward for Two Harbors, offering its shareholders $10.35 per share in cash, valuing the company at approximately $326 million. The deal is expected to close in the second quarter of 2024, subject to customary closing conditions, including regulatory approval. This acquisition will allow CrossCountry Mortgage to expand its presence in the mortgage servicing rights (MSR) market, a key area of focus for the company.
Shifting Landscape of Mortgage REITs
Two Harbors Investment Corp. Is a prominent player in the mortgage REIT sector, specializing in investing in mortgage-backed securities (MBS) and servicing rights. The company’s portfolio primarily consists of agency MBS, which are guaranteed by government-sponsored enterprises like Fannie Mae and Freddie Mac. However, the REIT sector has faced significant challenges in recent years due to rising interest rates and increased volatility in the MBS market. The Federal Reserve’s aggressive interest rate hikes in 2022 and 2023 led to a decline in the value of MBS holdings for many REITs, including Two Harbors.
The acquisition by CrossCountry Mortgage represents a strategic exit for Two Harbors from the publicly traded REIT space. For CrossCountry, it’s an opportunity to bolster its MSR portfolio, which generates recurring revenue through the collection of mortgage payments. MSRs have become increasingly valuable to mortgage lenders as origination volumes have declined. According to a recent report by the Mortgage Bankers Association, mortgage application volume is down significantly compared to previous years, making servicing a more critical component of profitability.
Impact on UWM Holdings and the Wholesale Market
The collapse of the UWM-Two Harbors merger has implications for UWM Holdings, one of the largest wholesale mortgage lenders in the United States. UWM had hoped to leverage Two Harbors’ MSR portfolio to enhance its servicing capabilities and expand its market share. The company will now require to pursue alternative strategies to achieve these goals. UWM has not yet commented extensively on the termination of the deal beyond its initial statement confirming the event.
The original UWM-Two Harbors deal drew attention from regulators concerned about the potential for increased concentration in the wholesale mortgage market. UWM already holds a substantial share of this market, and the addition of Two Harbors’ servicing portfolio could have further solidified its position. The Department of Justice (DOJ) had reportedly been investigating the proposed merger, according to HousingWire, raising concerns about potential anti-competitive effects.
What’s Next for CrossCountry and Two Harbors?
Following the announcement, CrossCountry Mortgage’s stock price saw a modest increase, while Two Harbors’ shares rose sharply, reflecting investor confidence in the deal. The next key step will be securing regulatory approval for the acquisition. Given the scrutiny surrounding recent mortgage industry mergers, the process could accept several months. CrossCountry Mortgage will also need to successfully integrate Two Harbors’ operations and personnel into its existing business.
Analysts predict that further consolidation is likely within the mortgage industry as companies seek to adapt to the changing market conditions. The combination of CrossCountry Mortgage and Two Harbors is just one example of this trend. The focus for many lenders will be on building scale, diversifying revenue streams, and improving efficiency. The long-term impact of these changes on borrowers and the overall housing market remains to be seen.
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Investing in mortgage-backed securities and REITs involves risks, including the potential loss of principal. Consult with a qualified financial advisor before making any investment decisions.
The completion of the acquisition is the next confirmed milestone to watch. We will continue to follow this story and provide updates as they become available. Share your thoughts on this developing situation in the comments below.
