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Community bankers at a mortgage conference in North Carolina admit that higher rates and new regulations trouble them, but they say they are customizing purchase products, returning to old-fashioned sales efforts and learning new business skills in response.
September 11 -
Ocwen's agreement to buy $78 billion in mortgage servicing rights from OneWest is part of a string of deals by it and other nonbanks meant to wring value from remnants of the mortgage meltdown that many banks seek to unload.
June 14 -
The Atlanta mortgage servicer said Thursday it would buy $78 billion in unpaid principal balances of mortgage servicing rights using a combination of cash and available credit.
June 13 -
Deloitte Corporate Finance has acquired McColl Partners, a middle-market investment bank founded by retired Bank of America Chief Executive Hugh McColl.
June 10 -
Purchasing $34 billion of servicing rights would provide Quicken with a steady income stream that could help offset the inevitable decline in refinancing activity.
March 21
More mortgage originators could change hands in coming months as pressure mounts on small banks and servicers to deploy excess capital and pad revenue.
More than a dozen mortgage lenders have sold this year, and Charles Welch, a managing director at Deloitte Corporate Finance, said this type of M&A activity is expected to increase in 2014.
"It is better today to sell as a mortgage company than it was a year ago, and it should be even better next year," Welch said this week at a mortgage conference hosted by the North Carolina Bankers Association.
Community banks are the most likely buyers, said Welch, who was at McColl Partners in Charlotte, N.C., before it was
Bankers continue to lament the
"We are doing a lot of training for our officers, sitting down and talking through how to become salesmen again," Ken Irvin, mortgage department manager at Bank of Tennessee in Kingsport, said during the mortgage conference. Due to high refinance activity "we lost the part about really going out and making sales calls."
That shift could also motivate banks to buy an originator, particularly those with an established track record courting new home buyers, said Welch, who is working with a pair of mortgage lenders that are exploring strategic alternatives. "If you have a successful purchase model you will still be viewed quite favorably by an acquirer," he said.
Originators with a traditional focus on the purchase business are apt to command better premiums, says Daniel Jacobs, a partner at Pro Mortgage Branching Solutions in Charlotte.
"A company that was doing 90% refi would have negative value in an acquisition," Jacobs says. "The only mortgage companies with value are those that were outpacing their peers from the perspective of the purchase business."
As a rule of thumb, buyers will want to know that at least half of an originator's business is coming from new homebuyers, Jacobs says. Still, acquirers might be willing to buy a lender with a higher percentage of refinancings if it also can show an ability to generate a significant amount of volume, he says.
Community banks are mostly interested in mortgage lenders that already operate on their home turf, and those that have been approved by Fannie Mae and Freddie Mac have a higher franchise value, Welch said.
However, private equity may seize on acquisition opportunities than community banks, which tend to be more cautions, Jacobs says.
"I doubt community banks have a big appetite for the mortgage business," Jacobs says. "They should, though, because the fee income far outpaces the return on equity they can achieve from core banking services."
The most likely PE buyers are those that have already invested in servicing platforms, Jacobs says. Welch also noted that companies that bought servicing rights in recent years could have an interest in buying large originators. "That's interest that didn't exist a year ago," Welch said.
Earlier this year, Ocwen Financial (OCN) in Atlanta
The terms of mortgage acquisitions tend to be complicated, experts warn. Few assets change hands; buyers are paying for an origination platform and future income streams. So buyers usually are insistent that acquisitions consist of very little up-front money and heavy earn-out periods that could extend three years past a deal's closing. Those terms could be unsatisfactory for potential sellers, Welch said.
