Current State M&A and Why Mortgage Companies, Big and Small, are Moving
I've been hearing it for a while, "the market is slow, and home appreciation is stagnant." But here in South Carolina, for example, many markets are on fire. As Zillow points out in Despite Rising Home Values, Affordability Remains Largely Intact for Buyers, many markets are still experiencing above-normal rates of home value growth, a general slowdown in appreciation is evident. "Among the nation's 35 largest metros, all but Indianapolis experienced year-over-year home value increases in July. Those with the most notable annual increases include Las Vegas (17.4 percent), Riverside (16.5 percent), Miami-Fort Lauderdale (15.8 percent) and Atlanta (14.9 percent)." It's Zillow, so be forewarned, if you click the link expect graphs with multiple colors and plenty of index numbers with strange nomenclatures.
A quick note about Friday's commentary: I noted an example of dumping loan files (with borrower information) in a dumpster. It was really late when I wrote that, or really early, but "Centennial Mortgage" was not involved - Centennial was the municipality - and the company was Colorado First Financial Mortgage. My apologies to any Centennial Mortgage people, living or dead, real or imaginary.
Changes are taking place out there in residential lending - players are changing teams, and teams are changing divisions and conferences. I say that not only because I am receiving a lot of LinkedIn notes and change of e-mail requests (although both are a leading indicator). As this commentary has mentioned for quite some time, the lending industry is either evolving or devolving - I don't know which. Big companies are reevaluating their channels (like Affiliated leaving correspondent), small companies are tired of compliance costs and hurdles, big companies are looking for acquisition targets (Caliber and Cobalt). Rumors are swirling that Mutual of Omaha is exiting residential lending and partnering up with Guild, mentioned below.
A KPMG banking industry outlook survey of 100 bank executives in the US finds the primary areas these executives say are the biggest barriers to growth for their bank over the next year are: regulatory and legislative pressures (41%); lack of customer demand (25%); pricing pressures (20%); risk management issues (19%); increased taxation (18%); US dollar strength (17%); staying on top of emerging technologies (14%); inflation (12%); labor costs (12%) and a lack of qualified workforce (11%). And any mortgage bank can use those same factors in the decision to scale back or find a larger partner.
But what does a company buy when they purchase another mortgage company? They aren't all walks on the beach and Boone's Farm Chablis in the hotel room. Something is worth what someone else is willing to pay for it, right? Every deal is a little different, of course, and it depends on the sizes involved. The purchases hopes that what they have after the deal closes is something more than leases, cheap vacant office furniture, and vendor contracts that must be phased out. Often a buyout is involved with the owners, cash is "taken off the table" by the seller, and perhaps employment agreements are put in place for key originators. If the seller is large enough to have servicing, that is a big plus. Negotiating deals, of course, is very dependent on the motivation of the buyer and sellers - and there is plenty of motivation right now.
Jeff Babcock with STRATMOR scribes, "After the dismal 1st Quarter results, most mortgage executives have expressed renewed optimism based the robust 2nd and 3rd Quarter production volume recovery. But we at STRATMOR sense that their mood is darkening as the reality of seasonal downturns looms just around the corner. If the 4th Quarter of 2014 and 1st Quarter of 2015 origination experience proves to be a repeat of last year, management will be severely challenged to sustain profitability. The specter of layoffs, margin compression and compensation pressure is disdainful to most mortgage entrepreneurs. Throughout 2014, the mortgage business is experiencing a level of M&A activity not seen for many years. And it's been a true sellers' market for well-managed independent retail mortgage banks. Investor demand remains very strong, so sellers have been successful in negotiating healthy valuation premiums. Every transaction in STRATMOR's deal pipeline reflects this robust marketplace environment."
His note continued. "But what happens to the M&A investor attitude if our industry experiences two consecutive years of semi-annual origination cyclicality and earnings volatility? The resulting uncertainty will certainly have an adverse impact on deal terms, thereby reducing the premiums paid at closing and deferring more value to a contingent arrangement (aka earn outs). In response to this marketplace stress, STRATMOR anticipates more midsize lenders will be compelled to consider their 'strategic options,' thereby increasing the supply of available acquisition opportunities. STRATMOR's timing advice for prospective sellers: don't wait until next spring to explore your options. It's still a sellers' market and your negotiating position remains favorable." (If larger firms would like some objective feedback and a fresh market perspective, reach out to Jim Cameron or Jeff Babcock if you are interested in discussing M&A opportunities.)
Last week there were a few other deals announced besides the Caliber-Cobalt marriage. News broke that New Hampshire's Regency Mortgage Corp. will be acquired by California's RPM Mortgage. "Regency Mortgage Corp. remains fully intact, charged with growing RPM's New England business. Regency will still operate under the Regency brand and will have all ops remain local...much improved jumbo pricing...a suite on non-QM products that RPM created...an eventual move from NYLX to Optimal Blue... (originators) able to select an RPM-serviced price each day which will allow your contact information to go out monthly with the mortgage statement to your serviced borrowers."
And early last week this commentary mentioned a rumor that turned out to be true. (I do my best to only mention that kind.) In California Guild Mortgage announced the acquisition of Comstock Mortgage, a Sacramento-based independent mortgage banking company with 15 offices, more than 180 loan officers and support staff, and $600 million in loan originations in 2013. (I'll save you breaking out the calculator: I am sure that there are timing differences, but the $50 million per month works out to less than $300,000 per the 180 LOs & support staff, a reflection of how the entire industry has trended.) "By acquiring Comstock Mortgage, effective Oct. 1, Guild Mortgage will continue to grow and increase its number of branches and satellite offices throughout the nation. For background, Guild Mortgage has more than 200 branch and satellite offices in 23 states. It generated loan volume of $7 billion and servicing volume of $13 billion in 2013." (From 2010 to 2013, Guild grew from its western base into the Southeast and Southwest, increasing its number of branches and satellite offices from 75. Loan volume in the same period jumped to $7 billion from $4.1 billion. Servicing volume more than doubled from $6.4 billion.)
Things have changed with commercial banks and savings institutions insured by the FDIC; these institutions have reported aggregate net income of $40.2 billion in the second quarter of 2014, which is up $2 billion (5.3%) from earnings of $38.2 billion the industry reported a year earlier. The increase in earnings was mainly attributable to a $1.9 billion (22.4%) decline in loan-loss provisions and a $1.5 billion (1.4%) decline in non-interest expenses. Also, strong loan growth contributed to an increase in net interest income compared to a year ago. Lower income from reduced mortgage activity and a drop in trading revenue, however, contributed to a year-over-year decline in non-interest income.
In security news, Freddie Mac priced a new Structured Agency Credit Risk (STACR) transaction totaling $770 million. This STACR series represents the fifth offering this year that Freddie Mac is transferring a portion of its credit risk on certain groups of loans to private investors. The first HQ Series transaction took place last month on loans between 80 and 95 percent LTVs.
Turning to the bond markets, we continue to be lulled to sleep with low volatility in bond prices and no inflation. Friday we had a smidgeon of economic news with the Leading Economic Indicators: "The LEI's six-month growth trend has been held back slightly by lackluster contributions from housing permits and new orders for nondefense capital orders. Despite concerns about investment picking up, the economy should continue expanding at a moderate pace for the remainder of the year." Rating agency Fitch confirmed its U.S. ratings of AAA - thanks!
But the big news of the week was expected: the Fed further reduced its asset purchases by another $10 billion and kept rates steady. It also decided to keep the language "considerable time" to refer to the period between ending its asset purchases and raising the fed funds rate. And lenders should remember that the Fed sets overnight rates, whereas supply and demand set mortgage rates. Most see rates staying put through the end of the year, and perhaps overnight Fed Funds closer to 1% by the end of 2015.
I don't know how we're here at the last full week in September already, but we are. And we have a whole bunch of economic news, so let's take a look at the menu .Today we have the tasty Existing Home Sales. Tomorrow is the piping hot FHFA House Price Index. Wednesday is MBA applications and New Home Sales. Thursday are Jobless Claims and the always volatile Durable Goods (one aircraft order from a domestic manufacturer can really throw things off). Friday we'll dine on GDP, Personal Income and Consumption, some PCE chatter, and finish off with mints and the University of Michigan Consumer Confidence. For those quantitatively inclined, the 10-yr closed Friday at 2.59% and this morning we're at 2.57% with agency MBS prices a shade better.
Jobs
Back in April the commentary mentioned explosive growth at LoanStar Home Lending. Where are they now? After launching last November the Portland, Oregon based mortgage bank now has nearly 170 employees from Seattle to Dallas and most points in between. As President & CEO Mike Baldwin explained in a recently produced Mission Statement video, "we're growing, and we are busy!" LoanStar has been busy, with new branches opened in Dallas/Fort Worth, Albuquerque, Phoenix, Clackamas, OR, and Everett, WA since the commentary last reported in April. LoanStar also has a new facility under construction in Vancouver, WA and Orange County, CA slated to open in October. "We continue to attract talent based on our ability to close loans efficiently, a broad offering of correspondent lender relationships, and a top-flight concierge marketing system. Our system is designed to allow originators freedom to originate new loans and relationships and not process loans, conduct damage control, or spend time trying to figure out how to market themselves. That is what the loan officers say they want, and that's what we deliver," says Baldwin. To learn more, visit www.GoLoanStar.com and contact the regional manager closest to you, or contact Kenn Bartley, SVP Business Development.
Castle & Cooke Mortgage LLC (CCM) is expanding and actively seeking highly skilled Branch Managers and their teams! "CCM is one of the few lenders in the country that is a direct Fannie/Freddie/Ginnie seller/servicer, which means amazing speed and control of your files. CCM is known for incredible turn times and is committed to being a market leader in products, technology, and service. You and your branch staff will be backed by state-of-the-industry software, marketing, and training resources. If you and your team are looking for a fantastic platform that gives you the ability to consistently produce and grow, give CCM a call. The Branch Manager position reports directly to the SVP and requires at least 2 years in branch management experience. Candidates being considered for this position will be subject to additional background checks as required. Please contact Christopher Jensen or Jim Hoggan for further information, or go to Castle&CookeMortgage. All qualified applications will receive consideration for employment without regard to race, color, sex, national origin, protected veteran status, or disability.