The mortgage banking industry and the M&A advisors that serve them face a conundrum: profit margins on new originations are the best they’ve been in decades but outside investors continue to suffer from anxiety about the business.
Still, at least one large M&A deal is in the works (Ocwen’s purchase of Homeward Residential) with several smaller deals on the horizon.
It may a bit premature to predict that a boom in mergers and acquisitions is just around the corner, but at the very least there appears to be some jockeying for position among firms already plying their trade in residential finance.
“Small M&A deals are definitely picking up,” said Larry Charbonneau of Charbonneau & Associates, Spring, Texas. “I’m working on three deals right now.”
Charbonneau, like most advisors, cannot discuss the transactions he’s involved with until they actually close but hinted that deals center around smaller firms, though profitable, that are searching for financial partners. The reason for the search: the fear that come next year higher minimum net worth requirements might be required by the GSEs or even the Government National Mortgage Association.
“We’re looking at mergers between larger, well-capitalized mortgage bankers, but also mortgage bankers that are looking at undercapitalized firms,” he said.
(The higher net worth requirement, at this point in time, is more of a fear than an actual proposal but there have been rumblings among some lenders about an unofficial net worth hike that isn’t codified in ink.)
Chuck Klein, who years ago was Charbonneau’s partner, said he, too, is seeing a pickup in M&A work. His firm, Mortgage Banking Solutions, is presently juggling a handful of possible transactions and a few months ago was a party to Crockett National Baking buying a controlling interest in Gardner Financial Services.
Tom Piercy, managing member of Interactive Mortgage Advisors, said his company is involved in “a couple of evaluations” but cautions that buyers are trying to avoid paying any type of premium.
He notes that the two most valuable “assets” buyers are looking at getting their hands on include the mortgage servicing portfolio, and seller/servicer approvals granted by Fannie, Freddie and Ginnie. “Direct access to Fannie and Freddie is what they want,” he said. As for profitability, he concurs that prices being made for newly created MBS are in the stratosphere. “GNMAs are going for 105, 106,” he said. He quoted a price of 108 (par is 100) for Fannie Mae coupons of 3.5%.
Bill Dallas, CEO of Skyline Home Loans, Calabasas, Calif., is one firm that considers itself on the “buy side” of any possible M&A deals. “Margins are very fat right now,” he said, “but some people don’t realize the amount of capital it takes to be in this business.” Dallas, who has been in the business for several decades, said he’s talking to investors about raising cash that would allow Skyline to expand its presence in servicing. “Most investors are still scared of the industry,” he said. Skyline presently uses a subservicer but would like to keep more of the servicing strip. As for the companies that Skyline is looking at, most are small originators. “Some firms we looked at were doing $30 million a month [earlier this year]. Now they’re doing $100 million. These firms might be good at originating but they’re not good administrators.”