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.

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 MA 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.”

note continued. “But what happens to the MA 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 MA 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.

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!

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.

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.


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 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 CastleCookeMortgage. All
qualified applications will receive consideration for employment
without regard to race, color, sex, national origin, protected veteran
status, or disability.

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