Taylor Capital's Scrapped Mortgage Sale Reveals Pricing Divide

Add Taylor Capital (TAYC) in Rosemont, Ill., to the list of banks discovering the fickle nature of the mortgage industry.

Taylor, which is in the process of selling itself to MB Financial (MBFI) in Chicago, last week scrapped plans to sell its mortgage business. It would be incorrect to determine that Taylor's unwillingness, or inability, to sell its mortgage platform signals an end to mortgage M&A, industry experts say.

Investors continue to pursue ways to expand their mortgage holdings, and banks remain interested in niche businesses. Still, uncertainty in the mortgage market and an ongoing divide over pricing could stymie deals.

"You'll see some consolidation within the mortgage industry, either forced or voluntary," says Jeffrey Levine, managing director in the financial institutions group at Houlihan Lokey. "I don't see the Taylor deal as a harbinger of banks saying, 'We don't like this business anymore.'"

There were always doubts that Cole Taylor Mortgage could fetch a price that would compel its parent company to sell. Mitchell Feiger, the $9.6 billion-asset MB Financial's president and chief executive, said in July that a deal was "unlikely to occur, or if it occurred, would be very unlikely to yield an amount sufficient to generate additional merger consideration for Taylor's shareholders."

Feiger noted during a conference call last month that Taylor was still looking for a buyer. He praised the mortgage division, calling it "expertly run" and adding that it would be a nice addition for MB Financial. A sale would "be good for everybody, and if there isn't, fine," he added. "We're very happy to have the business."

Taylor ultimately decided that "potential buyers didn't share our appreciation for the long-term value of the business," Mark Hoppe, the company's president and chief executive, said in a release. A Taylor spokesman said company executives were unavailable to comment further..

The outcome failed to surprise industry observers, who noted that the mortgage industry has endured widespread changes since long-term rates spike last summer. As a result, refinancing activity stalled and mortgage lenders began shifting resources to target homebuyers.

"The mortgage business has needed to go through somewhat of a reinvention," says L.T. "Tom" Hall, president of Resurgent Performance. "Volumes are so anemic. Home prices are coming back, we are starting to see some purchases and some areas have pretty good volumes. But overall it is still looking weak."

Banks have posted plummeting mortgage banking income in recent quarters. Taylor is no exception; its mortgage banking revenue fell nearly 28% in the first quarter compared to a year earlier, to $23.1 million.

"The dynamics of the mortgage market have changed," says Christopher McGratty, an analyst at Keefe, Bruyette & Woods. "We thought they would retain it because the price Taylor may have negotiated was not acceptable. The implication for MB is this is a new business for them."

Despite the challenges facing the mortgage business, M&A is expected to continue. Levine says his firm's "pipeline is fuller than it has ever been." Sellers are likely to be privately held mortgage banks looking to leave the business or realign with partners with deeper pockets. Potential buyers could include investors that are looking at the business as a strategic move or existing mortgage lenders looking to add scale. Private equity firms could also be forming platforms to support doing non-qualified mortgage lending, Levine says.

Banks could also be interested in bulking up, says Terry Keating, executive vice president at Accord Financial. Industry observers have repeatedly said that as regulation becomes more complicated, banks would need scale in mortgages.

"There's still an active market in banks that are interested in being in mortgages," Keating says. "There have been a handful of banks that want to be in it and continue to put resources in and sort of up the ante. Others have taken the view that they have no interest in mortgages." 

The sticking point remains pricing, some industry observers say. Taylor reportedly was in talks with a private equity firm about the mortgage business, but the sides failed to agree on the price.

"It wouldn't surprise me with transaction volume for homes expected to be lower you will see more depressed prices in that industry," says Jeffrey Voss, a managing member of Artisan Advisors. "It is a very challenging market with rising rates."

As for MB, it "wouldn't be surprising if they eventually divest the mortgage unit because it doesn't fit their strategy," Voss says. (MB's acquisition of Taylor hasn't closed and could be delayed as Taylor faces an enforcement action from the Federal Reserve Board over deceptive trade practices in an unrelated business.)

MB could also tweak Taylor's national mortgage business, which includes wholesale lending, to fit its branch network around Chicago, industry experts say. Overall this could be a good move for MB, Keating says.

"The question is not whether the mortgage industry is changing, because it is and we've known that for a long time," Keating says. "The real question is whether Americans will stop buying and financing homes? And the answer to that is no."