Mortgage technology developer Optimal Blue acquired its largest competitor, LoanSifter, in a deal that combines the two largest standalone developers of product eligibility and pricing engines remaining in the mortgage industry.
Executives from the two companies said the transaction provides an opportunity to concentrate research and development resources and expand the quantity and type of mortgage lenders using the technology. The combined company has more than 1,500 mortgage lender clients that include mortgage brokers, small- to midsize nondepository mortgage lenders, as well as community banks, credit unions and larger depositories. The deal was finalized on Dec. 18. Financial terms were not disclosed.
"We're able to consolidate resources more effectively on a single mission, rather than two companies doing the same thing in parallel, which will make us that much more broad-spectrum and effective," says Optimal Blue Co-CEO Larry Huff in an exclusive interview prior to the acquisition's announcement.
Both companies develop software-as-a-service applications that share many attributes, says Bruce Backer, LoanSifter's former president, who now assumes the title of managing director at Optimal Blue.
"I've been surprised at the degree to which we are similar and in fact, when we've talked about our challenges, they're very similar," he says. "We've struggled to do certain types of integrations, work with certain types of clients and other various issues in the market that are common."
Along with LoanSifter's Appleton, Wis.-based office, Optimal Blue will have three offices, including its headquarters in the Dallas suburb of Plano and the Denver-based operation it acquired in its 2008 purchase of Secondary Interactive (now called Optimal Blue Secondary Services). There are no plans to lay off any of the combined company's 200 employees, Huff says.
Optimal Blue received an investment from Serent Capital, the San Francisco-based private equity firm announced in February. An Optimal Blue filing with the Securities and Exchange Commission in January discloses an exempt offering of securities valued at $22.4 million. Huff, fellow Co-CEO Ivan Darius and "a few employees" also hold ownership stakes in the company. LoanSifter's primary owners include Backer, chairman John Wiley and founder and former chief technology officer Craig Doriot, along with a small group of local shareholders in Wisconsin.
The LoanSifter brand will be eliminated and the company will unify under the Optimal Blue brand. "Since we are direct competitors and we have very similar products and services, we hope that will make it easier for the market to understand our single purpose rather than have confusion around different names and labels and brands," Huff says.
Both technologies will continue to operate as they had prior to the acquisition in the short-term. Eventually, Optimal Blue will have a single product eligibility and pricing engine, or PPE, platform, but those efforts are still in the early planning stages.
"Because of the competitive nature of this transaction, we currently have not been able to produce a real detailed plan in that context," says Darius. "There are certain aspects of both systems that are obviously redundant; there are certain aspects that are not…We are going to probably spend the next few months coming up with that plan. In the meantime, it's essentially business as usual."
Product eligibility and pricing engines were developed in the late 1990s to eliminate the daily rate sheets that loan officers received via fax from investor partners. Huff and Darius started PPE pioneer Sollen Technologies in 1999, then left to found Optimal Blue in 2002. Optimal Blue later acquired Sollen in 2011.
The technology rose in prominence during the housing boom because of its ability to sort and manage the myriad loan products and investor types available to originators. Following the financial crisis and reduction in investors and loan types, PPEs shifted their focus by adding on additional origination capabilities.
Many PPE vendors were acquired by mortgage loan origination system developers looking to expand the functionality of their underwriting workflow platforms, including Calyx Software's acquisition of Loan-Score Decisioning Systems in December 2010 and Ellie Mae's acquisition of Mortgage Pricing Systems in January 2011.
Despite the consolidation, Huff says there is still a need for standalone pricing engines, which he compared to the inventory control system in a manufacturing process. Loan origination platforms are akin to an assembly line, and each technology has unique sets of complexities.
"There's never going to be a single system that does everything to the highest level of standards that two companies can do independently. It's just not a big enough market to do that," he says. "What we've tried to do is take the concept of the product and pricing engine and all the things it's evolved into and make that a meaningful contributor to that manufacturing process."