M&A Rumor Mill Heats Up

Speculation that the nation's largest mortgage servicer, Washington Mutual, might consider an acquisition offer were bandied about by the media last month. The company's CEO downplayed talk of a possible sale and the market seems to consider it an unlikely trajectory for WaMu.

But the very fact that such rumors made their way into print point to a likely change in market conditions for the mortgage industry. With the refinancing boom slowing down, the merger and acquisition market may start to heat up.

Especially since, with rates edging upward, mortgage servicing rights are finally worth something again. That means potential buyers see significant value in the asset. And potential sellers have something to gain by considering an offer.

The WaMu rumors are probably just that, unsubstantiated rumors. But at the end of previous refinancing booms, some banking institutions and independent mortgage firms have typically taken the decline in mortgage origination volume as a sign that it's time to head for the exits. Usually, some firms sell their mortgage units and exit the business, concluding that mortgage lending is a scale business and only the big players will win in the long run. This thinking is especially prevalent on the loan servicing side of the industry.

But the conventional wisdom isn't always right, and we hope that lenders that are considering an exit will think carefully about the value of their mortgage franchise before taking advantage of a strong market for sales.

Mortgage lending is one of the key cornerstones of a consumer's financial relationship. Handing that business to someone else means not only giving up the cash flow associated with servicing rights, but also the opportunity for cross-sales and ongoing brand recognition. Servicing rights can be valued, but it's hard to put a price on lost opportunity.

And industry studies, particularly the MBA's data, show that small and midsized mortgage servicers continue to enjoy higher profitability than might be expected - often beating their larger rivals in terms of profit margin. That perhaps is the best clue that you might want to think twice before selling.

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