The online lender and wholesale mortgage bank MortgageIT Inc. has agreed to buy IPI Skyscraper Inc., the mortgage broker that spun it off in 1999, American Banker has learned.
The deal would create one of the nation's largest privately held mortgage banks and put the merged company in a position to consider a public stock offering. Though the price was not disclosed, executives at New York-based MortgageIT said the deal includes cash and equity in the combined firm.
IPI, also of New York, would convert to a mortgage bank after the transaction. The deal would give the merged company a staff of more than 100 loan officers and $100 million of revenue - and boost originations to $6 billion a year. IPI currently has one-fourth of the coveted Manhattan originations market.
"This gives us the strongest share in the New York market, which is valuable, and of course the opportunity for the additional profit through banking their loans," MortgageIT chief executive Doug Naidus said in an interview. "The company will improve profitability exponentially."
IPI is licensed in eight states and does most of its business in three: New York, New Jersey, and Connecticut. The merged company would expand IPI's operations nationwide, more than doubling its branches to 40 by the end of 2002. It initially would target major markets in the South, West, and Midwest such as Atlanta, Chicago, and Los Angeles, Mr. Naidus said.
IPI would be MortgageIT's third business unit, Mr. Naidus said. The others are both Internet: MITLending, a wholesale mortgage banking business, and MortgageIT.com, which strikes partnerships with operators of Web sites such as Fool.com and Mutlex.com to offer mortgage products to consumers.
MITLending works with mortgage brokers to obtain loans, and IPI's broker sales force works directly with borrowers. Under the deal, executives said, the IPI brokers would offer MortgageIT's products as well as its competitors'.
"This will be effectively a third-branch business for us - a third leg to the stool," Mr. Naidus said. "We now want to take the successful IPI formula and bring that to a national level."
Analysts who follow mortgage-related companies said the merged company could become a formidable competitor. Kenneth Posner, an analyst with Morgan Stanley Dean Witter, said the key trend in the mortgage business is to integrate Internet businesses and branches under a single strategy.
"Combining Internet and branch-based distribution channels gives you the power of both and the opportunity to work with consumers in both channels," Mr. Posner said. "My guess is that this transaction will give the company the ability to do just that."
Michael S. Hodes, an analyst with Goldman Sachs, said the deal "makes sense." Though the mortgage market is "extremely fragmented," he said, "I've been impressed with Doug's stewardship at MortgageIT and his understanding of the industry."
The two companies and their chief executives have a long history together.
Mr. Naidus and Mark Pappas co-founded IPI Financial Services in 1988. They started MortgageIT 10 years later as the technology division of IPI Financial. Saying they wanted to concentrate on the technology unit, the two spun off MortgageIT in 1999 but continued to run IPI. Last year they helped IPI merge with Skyscraper Consultants Inc., a New York brokerage.
After the merger Mr. Naidus and Mr. Pappas kept their board seats at IPI Skyscraper but relinquished their management roles. Mark Schwaber, who founded Skyscraper in 1986, became president of the combined company, and Neil Bader, who joined Skyscraper in 1988, became its chief executive.
IPI Skyscraper and MortgageIT, after the spinoff and merger, focused on running their separate businesses - and this year's booming mortgage market kept both of them immersed.
But they were brought together again this spring, when IPI Skyscraper received two separate acquisition offers - from a commercial bank and a publicly traded mortgage bank, company officials said.
As chairman of both boards, Mr. Naidus found himself in a spot. He and Mr. Pappas - also a member of both boards - recused themselves from the MortgageIT board temporarily to let their company pursue the IPI bid on its own. As members of the IPI board, they then decided to accept the MortgageIT offer.
"We decided we'd rather keep it in friendly hands," Mr. Naidus said.
In the merged company, Mr. Naidus would be the parent's chief executive and Mr. Pappas would assume daily management for the retail branches in addition to his current responsibilities as president. Mr. Bader would join MortgageIT's national business development team, and Mr. Schwaber is to remain divisional president of IPI.
MortgageIT has burned through $20 million of the $50 million it has raised since 1998, though Mr. Naidus said it still has "the majority" of its capital.
Nonetheless, Mr. Naidus scoffed at the notion that the deal is meant chiefly to give MortgageIT a quick change from struggling dot-com to a traditional firm with solid profits. MortgageIT, he said, has done great without IPI.
"We're on track to earn millions of dollars in net profit this year," he said. MortgageIT first became profitable in April and has remained in the black, Mr. Naidus said.
More important, he said, the combined company would have a better revenue stream by brokering the loans, creating an arbitrage opportunity. "This improves the price we get at market brokering the loan on a loan-by-loan basis," Mr. Naidus said.
Just as helpful, several of MortgageIT's competitors have fallen off the map, including Mortgage.com and iOwn.com. And two of the best-known surviving online mortgage brands, E-Loan Inc. and LendingTree Inc., have yet to report a profit after losing more than $100 million each so far.
"I'm glad to hear" that MortgageIT "is continuing to move forward, because a lot of folks haven't," Mr. Posner said. "This just shows that the real entrepreneurs are the ones who have developed the efficient cost structures."
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