Quicken Loans Prepares for End of Refi Boom with Ally Deal

In acquiring a pool of mortgage servicing rights from Ally Bank, Quicken Loans is seeking to extend the refinancing boom just a little longer while positioning itself for when the party is over.

Detroit-based Quicken Loans, the largest U.S. nonbank mortgage lender, said Thursday that it would pay Ally $280 million to buy the servicing rights for a $34 billion portfolio of performing loans.

In the short-term, the deal would help Quicken maintain its position as one of the nation's top refinancing shops. The portfolio includes a large percentage of loans with higher-than-market interest rates that can still be refinanced, particularly through the government's Home Affordable Refinance Program.

"Every mortgage originator out there is trying to find ways to keep refinance volume up," says Matt Maurer, a managing director at MountainView Servicing Group, a Denver advisory firm. "It makes a lot of sense for Quicken to buy a seasoned portfolio of higher-coupon product that can potentially be refinanced."

Long-term, the deal would provide Quicken with a steady stream of income that observers say could offset the inevitable decline in refinancing activity. Banks and mortgage lenders are increasingly searching for new income streams because refinancing activity is widely expected to dry up in the second half of 2013. The reason: with interest rates at historic lows, most borrowers eligible to refinance have already done so.

Refinancings have made up roughly 75% of all mortgage transactions in the first quarter, but are expected to plummet dramatically in the next year, to an estimated 34% in the first quarter of 2014, according to the Mortgage Bankers Association.

Quicken has benefited from the boom; its lending volume hit $70 billion last year, a 133% jump from 2011. The privately held company does not break out its volume of refinancings versus home purchases.

Quicken joins a host of nonbank lenders including Ocwen Financial (OCN), Nationstar (NSM), Walter Investment (WAC) and PennyMac, that have lined up to buy mortgage servicing rights from banks — many of which are scaling back in servicing to comply with proposed Basel III capital requirements.

For Ally, the $94.8 billion-asset unit of Ally Financial, the sale marks its final retreat from the legacy servicing business of its bankrupt Residential Capital unit. Ally is preparing for an initial public offering and unloading servicing rights is consistent with its plan to market itself as a pure-play auto lender.

Quicken is still a relatively minor player in mortgage servicing, but the deal for the Ally portfolio — its largest-ever servicing acquisition — signals its grander ambitions. "We have not been bashful in making the market aware of our interest in acquiring servicing rights," Bill Emerson, Quicken's chief executive, said in a press release.

As a direct-to-consumer online lender, Quicken may be more vulnerable to a refinancing slowdown as interest rates rise. The company has struck a number of recent deals, including selling its proprietary loan origination platform to JPMorgan Chase (JPM), to capture more fee income.

Daniel Jacobs, the president of retail branching at Residential Finance Corp., a Columbus, Ohio-based lender, said nonbank mortgage originators cannot survive on refinancings alone and will need to generate income from both lending and servicing.

"We are going to go through a dark period for refinances," says Jacobs. "Those lenders that are heavily reliant on refinancings are going to find themselves out of business unless they come up with other income streams. They will not be able to keep their doors open when interest rates rise."

Still, most observers expect refinancing activity to remain strong for the next couple of quarters, in part because as many as 3 million borrowers could be eligible to refinance through HARP.

In an interview Thursday, Quicken's Emerson said the Ally acquisition represents a chance to move many borrowers into HARP loans.

At the same time, Quicken intends to mine the portfolio for opportunities to originate new loans to borrowers who are looking to buy new homes, Emerson said.

"It's an additional origination opportunity," he said.