How Mortgage Mega-Vendors Are Coping with Origination Slump
For the mortgage industry's top technology and service vendors, it's diversify or double down.
Fidelity National Financial and First American Financial are coping with the originations slump by pitching lenders additional technologies and services that complement their core title businesses. CoreLogic, by contrast, is working to diversify its clientele beyond mortgages.
All three companies face contraction among their customers. Industrywide origination volume was off about 43% year-over-year in the fourth quarter, and down 57% year-over-year in the first quarter. The Mortgage Bankers Association forecasts annual origination volume for 2014 will be $1.1 trillion, down from $1.75 trillion in 2013," the lowest overall annual total since 2000."
"They're recognizing that they're operating on razor-thin margins on their primary book of business with large revenue amounts and that they need higher-value, higher-margin businesses surrounding their core," says Jordan Brown, CEO of Marketwise Advisors, an investment banking and consulting firm that specializes in the mortgage industry. "Software and services businesses surrounding title are higher margin, high value, and provide deep, relationship businesses with their clients."
The foundational title insurance businesses provide a source of stability for Fidelity and First American. While loan production is down, the mix of business has shifted from refinancing to home purchase loans — and the latter are more lucrative for title firms.
Purchase transaction title policies generate twice as much revenue as refi policies, so with purchase orders currently accounting for about 60% of all title business, revenue is stable, even though order count is down.
The insurance for purchase mortgages is more expensive because the transactions carry more risk, but the profit margin is comparable to policies for refinance transactions, says Brent Bickett, president of Fidelity National Financial.
"[I]t's not twice the work…But on average we're going to get more raw dollars into our company from a purchase deal than a refinance deal just because you are dealing with twice the revenue," Bickett said at a June 3 investor conference in New York.
Rising home prices are also helping boost fee revenue for title companies, since their fees are a percentage of the purchase price. The 11% increase in national prices during the first quarter spurred a 6% increase in First American Financial's fee per file, estimates Chief Financial Officer Mark Seaton.
"The rough gauge is for every dollar of home price appreciation, we get about 50 cents of increase in our fee per file," he said during his firm's presentation at the investor conference. "So as housing prices continue to increase, we have this sort of natural price increase built into the way our fees are structured."
To wring more revenue out of their lender relationships, both companies have recently closed large acquisitions — Fidelity's $2.9 billion purchase of Lender Processing Services and First American's $155 million acquisition of Interthinx.
Acquiring LPS (which has since been combined with Fidelity's ServiceLink unit to create a new entity called Black Knight Financial Services) put Fidelity in control of Mortgage Servicing Package, the servicing system of record with 55% market share. While it's an established business, there's room for growth by cross-selling origination technology, analytics and data products.
"Prior to buying LPS, we had a 35% market share in the title world. We really couldn't buy any more in title from an [Federal Trade Commission] perspective, given that we are the largest," Bickett said. "So this actually opens up a whole new investment area that we are very familiar with, given our experience in growing FIS into the world's largest fintech processor."
Likewise, acquiring Interthinx helps boost First American's capabilities in areas like compliance and fraud detection that are critical in today's mortgage industry.
"The environment has created opportunities for providers to try to offer services in a regulatory environment that's striving for zero defects," said First American CEO Dennis Gilmore.
"We think that there's a growth opportunity in the compliance space and what we want to do is compete in the identity side — that was our Interthinx acquisition — and the second component there would be valuation," Gilmore added. "We have a valuation offering right now, but it's not material in size, so we'd like to add to our valuations services."
By contrast, CoreLogic wants to diversify beyond its role as a behemoth vendor in the mortgage industry. This was the motivation for its acquisitions of Marshall & Swift/Boeckh and DataQuick; Bank of America’s flood and tax processing operations; and the catastrophe modeling firm Eqecat.
"There's an interest by large financial entities to have a diversification across multiple business segments," Brown says of CoreLogic. "Horizontal plays to have more segments make them more attractive of an asset because they're less susceptible to the ups and downs that are specific to the mortgage industry."
By retooling certain of its property-data, analytics and geospatial location assets, CoreLogic is expanding into the telecommunications and utility, insurance, energy and government sectors, as well as internationally in Australia and New Zealand.
Where mortgage industry operations previously accounted for 85% of revenue, it's now closer to 55%, CFO Frank Martell said during CoreLogic's presentation at the conference.
"Essentially we're going from a company that was primarily focused on supporting the origination and servicing of a loan and most of our data, analytics and services were related to that loan life cycle…[to] looking at the company more from a property insight and a property content focused company," Martell said.
"So we're diversifying the application of those data assets…applying the foundations of the company, which are really property records and our analytical insights around the property…[and] looking at a company much more from a monetization of data across verticals, versus just mortgage," he added.
At the same time, CoreLogic, as well as Fidelity, are shedding and restructuring operations.
In February, CoreLogic announced its plans to sell off its Asset Management and Processing Solutions segment. The business, which encompasses foreclosed-property asset management and field services, valuations and assorted default servicing technologies, was a viable operation during the throes of the housing crisis. But with foreclosure volumes receding and CoreLogic changing its focus, it's no longer a good fit.