TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/1345021
14 | M R EP O RT FEATURE S trong home sales, low interest rates, widely available capital, and aging business ownership have led to a robust mortgage IPO market in recent months. According to STRATMOR Group, before the end of 2020, equity investors or private com- panies held an interest in 17 of the top 25 independent mortgage bankers, accounting for more than 40% of the total IMB market. Existing-home sales closed 2020 on the upswing, reaching their highest level since 2006, accord- ing to data from the National Association of Realtors (NAR). Interest rates remained at historic lows, with no indication from the Federal Reserve or the bond market that rates would increase any time soon. Moreover, private individual investors in these com- panies are reaching ages where they are looking to cash in at least some of their investment, accord- ing to mortgage industry experts. "The M&A deals we're seeing are game-changers," said Garth Graham, Senior Partner, STRATMOR Group. "They are record-breaking deals that have investors outside the industry put- ting money into mortgage banks that are generating solid profits." "In years past, we saw strong companies buying weaker counterparts, but this year, we're seeing strong buying strong," Graham added. "Buyers are will- ing to buy at a higher valuation because the entire market benefits from production momentum and because they see a multiple in the value they can add, albeit with stronger technology, better capital markets execution, or consolida- tion savings." "The investors are shrewd," said David Wood, Partner at Wipfli LLP. "The mortgage market showed how strong it was in 2019 and 2020. The overwhelm- ing desire to tap into that earning stream is why the mortgage IPOs are happening now. You want to sell when the market is high." "It's all about current valuation," said Joe Camerieri, EVP, Mortgage Cadence, who previously worked advising companies and investors on mortgage company valuations. "Things have changed dramatical- ly since the onset of COVID[-19]" It used to be that mortgage lenders were valued primarily on the value of their mortgage servic- ing rights, which were typically 95% of the value of the business, Camerieri added. But with the low rates and high demands in today's market, the supply and demand equation greatly favors lenders, Camerieri said. "There's a tsunami of oppor- tunity right now. People have lost sight of the cost per loan. Loan margins have increased anywhere from 200 to 400%." Today the cost per loan gener- ated is more important than ever in valuing a mortgage lender, Camerieri says. Lenders with a higher cost per loan generated will be valued lower than those with a lower cost per loan. Camerieri said the difference comes down to the mortgage lenders who count primarily on lending staff to generate, process, and close loans, as opposed to those that use more automation. He added that mortgage lenders should be continuing to invest in technologies that lower the cost per loan. "You need to have resources that aren't dependent on people." "If you depend on human beings, they can just walk away any time that they want and take their book of business with them," Camerieri said. If the lender instead "has an institutional way" of getting and booking mortgage loans, the cost is lower and the risk of business declining when a top producer(s) leaves is negated. The value of mortgage servic- ing rights will continue to decline over time, putting even more of a premium on the ability to grow loan production at a low cost, Camerieri said. Refinanced loans are also expected to decline over time, so there is an additional pre- mium on originating new loans at a low cost. Camerieri and Graham said the mortgage industry's current Striking While the Iron Is Hot From Rocket Companies to Home Point Capital, mortgage IPOs are becoming more common and catching investors' attention. By Phil Britt