Just as the housing markets are starting to show some renewed life after several years in the doldrums, mergers and acquisitions (M&A) activity in the mortgage banking industry is also starting to show vigorous signs of life. Several recent deals have been transacted in both the originations sector and among vendors, and industry participants expect more to come.
In August, for example, Hudson City Bancorp Inc. was acquired by M&T Bank Corp. in a $3.7 billion transaction. One month later, Walter Investment Management Corp. agreed to buy Reverse Mortgage Solutions, a leading reverse mortgage originator and servicer, for $120 million.
In the vendor space, Lender Processing Services Inc. recently agreed to buy Lending Space, a mortgage loan origination software company, while MountainView Capital Holdings, a fixed income capital markets firm, said it would buy Clayton IPS, the independent pricing service of Clayton Holdings.
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In the originations area, the M&A market is being driven by speculation that the government-sponsored enterprises (GSEs) will double their net-worth requirements for direct seller-servicers to $5 million. They only recently raised those requirements to $2.5 million from $2 million. That increase would force prospective originators below that threshold to go through the difficult process of raising capital, or selling themselves to a bigger company or selling their production to a shrinking number of aggregators.
One of the companies that plans on becoming an acquirer is Stonegate Mortgage in Indianapolis, which obtained its seller-servicer status in 2009 when it bought Swain Mortgage. The company is now on the prowl to acquire small and midsize originators to expand its retail lending unit.
‘I get a call probably every day from small to midsize companies with a lack of capital and liquidity who need someone to sell their loans to,’ says Jim Cutillo, Stonegate's founder and CEO. ‘The calls I'm getting are from people with more than $1 million but less than $2.5 million of net worth.’
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Cutillo adds that the higher net-worth requirements ‘scare some people,’ noting that smaller companies are being hurt by the retreat of the big servicing aggregators that used to buy their loans. This new void leaves smaller companies in the position of becoming direct sellers to the GSEs, in which case they have to either raise more capital or find another company to buy their loans.
Cutillo says Stonegate, which currently gets about 25% of its production from retail offices located in the middle of the country, is looking for companies that cover multiple states where Stonegate currently doesn't have a presence that can generate $250 million to $800 million a year in production.
‘There's a lot of really good originators out there – small to midsize mortgage banks – that are going to lack the liquidity and capital to move forward,’ he says.
In September, Stonegate agreed to acquire warehouse lender NattyMac from Guggenheim Partners. Stonegate plans to use the acquisition to create an integrated warehouse and loan sale solution so independent mortgage bankers have access to warehouse financing, liquidity for their agency loans and mortgage servicing.
‘Having the warehouse piece in-house helps us to help our correspondent lenders manage their credit, compliance and collateral risk,’ Cutillo says.
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John Walsh, president and founder of Total Mortgage Services in Milford, Conn., is also on the lookout for originators. However, phone calls that Walsh has been getting lately are from companies looking to buy his business. He says that he has been fielding ‘a couple of calls a week’ from prospective buyers.
Like Cutillo, Walsh notes that there are more barriers to entry than there used to be, such as the higher GSE net-worth requirements.
‘Becoming a mortgage banker now is hard to dive into,’ he says, noting that Total Mortgage has been a direct seller to Freddie Mac for several years and recently started selling to Fannie Mae, and it also expects to receive approval to sell to Ginnie Mae. The company is licensed to do business in 27 states.
‘Instead of someone else leveraging my company, I'm going to leverage it,’ Walsh says.
In the vendor space, John Walsh, president of San Diego-based DataQuick – not to be confused with the same-named chief at Total Mortgage – says the recent flurry of M&A activity is being ‘driven by lunacy,’ sparked by Davis + Henderson, a Toronto-based technology provider, which purchased two U.S.-based loan origination software companies earlier this year: the $232 million acquisition of Mortgagebot LLC in March and the $40 million purchase of Avista Solutions Inc. in May.
‘The Mortgagebot sale set a benchmark that was never seen before,’ Walsh says, adding that Avista was sold at a ‘very high multiple.’
But Walsh is hardly an observer to the M&A game. A few weeks ago, DataQuick closed on the purchase of Rels Title, which his company bought as part of a business expansion strategy.
Looking ahead, DataQuick's Walsh expects the next wave of consolidation to occur in the default management and foreclosure space.
‘With the mortgage market getting better, that part of the market looks like it's peaking,’ he says. ‘Selling at the top is always a good strategy.’
George Yacik is a Stratford, Conn.-based financial writer. He can be reached at gyacik@yahoo.com.