Two Harbors Investment Faces Dual Setbacks Amid Merger Plans

The planned multi-billion dollar merger with UWM Holdings was intended to provide strategic clarity for Two Harbors Investment Corp. Instead, the mortgage REIT’s path forward has encountered unexpected turbulence. A pair of negative developments emerged last Friday, applying fresh pressure on the company: a downgrade from a major financial institution and the launch of a formal legal probe into the transaction.

Potentially more significant is the second Friday announcement. The law firm Kahn Swick & Foti (KSF), led by a former attorney general, has initiated an official investigation into the proposed $1.3 billion all-stock acquisition. The firm stated it will examine whether the purchase price is fair and if the Two Harbors board of directors has adequately upheld its fiduciary duties to all shareholders.

Such inquiries are not uncommon preceding major mergers and acquisitions but can potentially delay regulatory approvals. This action signals that certain investors may question whether the long-term value of the portfolio of mortgage servicing rights (MSR) is fully reflected in the agreed exchange ratio.

Analyst Downgrade Highlights Limited Upside

The immediate catalyst for the recent sell-off was a rating adjustment by investment bank UBS. Analysts there shifted their recommendation on Two Harbors stock from "Buy" to "Neutral." Their rationale centered on valuation, arguing that the current share price already adequately reflects the value of the planned stock-swap transaction. Under the deal announced in December, Two Harbors shareholders are set to receive 2.3328 shares of UWM stock for each share they hold.

Should investors sell immediately? Or is it worth buying Two Harbors Investment?

UBS strategists noted that following a substantial rally of approximately 37.6% over the preceding six months, the potential for significant further appreciation beyond the fixed exchange ratio appears limited. While the strategic rationale for the merger remains valid, the scope for additional share price gains has narrowed considerably.

Earnings Report Takes on Heightened Significance

These new uncertainties arrive at a challenging time for Two Harbors. The company is contending with elevated debt levels and volatile valuations on its interest rate hedges. Its financial performance for the third quarter of 2025 resulted in a surprising net loss of $80.2 million, sharply missing market expectations.

All attention now turns to the fourth-quarter 2025 results, scheduled for release after the market closes on February 2. This upcoming report will be critical for assessing the company's book value and margins immediately ahead of the merger, which is slated for completion in the second quarter of 2026. Until then, the trajectory of Two Harbors' stock is expected to remain closely tied to movements in UWM's share price—all while the market monitors any developments from the ongoing legal investigation.