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The mortgage industry's march to consolidation accelerates as margin pressures intensify and origination volumes fail to grow fast enough to keep every last originator viable.

The number of merger and acquisition transactions jumped each of the last two years, according to data from Stratmor Group. A total of 32 M&A deals were announced within the industry in 2018 and the association expects even more in 2019. The question of whether to acquire, find a merger partner, or sell outright, will be on every responsible board's agenda.

For companies that choose to be buyers, potential targets should be ample. But in financial services, choosing a target and striking a deal is just part of the challenge. The real test comes in the execution after the deal is inked.

For this examination of mortgage M&A, National Mortgage News talked to a range of executives who recently have been involved in deals to get their thoughts on handling strategy, compliance, technology, and personnel in a merger.
Closing times
Need to execute
In almost every case, executives agreed quick execution was critical.

That was true in Citizens Bank's purchase of Franklin American Mortgage in May 2018. The deal was one of a growing number aimed at marrying banks' cost-of-funding advantage with independent mortgage companies' geographic reach.

The lack of overlap between the companies' primary businesses aided their integration.

"It was actually ideal. They had correspondent and wholesale, two channels we didn't have and we had a very substantial retail outfit," Eric Schuppenhauer, president of home mortgage at Citizens Bank, said in an interview.

"We kept the bare core technology for correspondent and wholesale and moved their small retail operation over to our platform."

The deal allowed Franklin American to phase out of its warehouse lending, a process that was finished within a quarter of the deal's consummation. (Citizens has maintained the Franklin brand, which already had significant reach.)

"That was one of the great synergies that came along with this integration," said Scott Tansil, executive vice president of capital markets at Citizens Bank and the former CFO and COO at Franklin American.

"It was a huge benefit to the Franklin American Mortgage piece because we had a secondary credit base in the market with various warehouse banks which came with a much more expensive cost of funds. As soon as we could, we got rid of those lines. Before year-end, we were off of all those lines effectively."

Gateway Mortgage saw a chance to capitalize on a similar opportunity, albeit from the other side, when it took on a majority interest in Farmers Exchange Bank in August 2018. The transaction provided Gateway with a bank charter and potential source of inexpensive funding. The mortgage division and bank will operate separately as Gateway Mortgage Group Gateway First Bank.

Gateway says it has a multiphase plan, the first of which upgrades Farmers' technology by moving it to a new core system, transferring all origination activity to that environment and cutting down closing times. Gateway also plans to invest in an overhaul of its loan origination system in 2020.
M&A Cover
Providing interim support
Movement Mortgage purchased the retail production division of Lennar Corp.'s Eagle Home Mortgage subsidiary in January. Onboarding the new hires was handled as if Movement embarked on a mass hiring spree. "We do not use the same loan originating system so we needed to train everyone on ours," Laura Bowles, CFO at Movement Mortgage, said in an interview. "But we onboarded this group of 230 [loan officers] like the way we'd onboard a group of new hires. We really did go out and train all of these folks on our new system, converted them over and brought them in."

The company deployed a 10-person team of human resources, IT and marketing leaders to barnstorm Eagle's four key markets of Boise, Idaho, Denver, Portland, Ore., and Seattle across a two-week period.

The team delivered in-person training to the Eagle originators on Movement's LOS, benefits package and marketing platforms. Some of Eagle's operations leaders were brought in for further multiple-day trainings on-site at sales support centers in Charlotte, N.C., and Tempe, Ariz.

Movement then created several channels for online support, an email inbox solely dedicated for any questions from incoming employees, as well as daily calls to resolve any potential problems. Additionally, there's been ongoing training and support — both live and virtual — since the deal closed on Feb. 1.

Even if both companies use the same LOS, transitioning the mortgages requires the acquirer to have enough loan officers to take the mortgages under their names while the licensing transfers. It typically takes a week to get the incoming loan officers up and running with the new company and it's an interim step taken to avoid violations. The backlog of loans gets transferred over to the purchasing company and there are licensing regulations to comply with.

"They used Ellie Mae Encompass just like we do for an LOS," Bowles said. "Ours is built out a little more than theirs, there are more rules, so that was probably a little bit of a learning curve for them."

During the interim period, each pending loan application will need to be supervised by a mortgage loan originator licensed in that particular state. The applications then need to be transferred to a currently licensed and company-sponsored mortgage loan originator already in good standing at the acquiring mortgage lender.

"If some other practice is used to handle the loan pipeline, there are risks of penalties from state regulators related to unlicensed loan activity, i.e., a loan originator who has not yet been sponsored by the acquiring mortgage company would be engaged in unlicensed mortgage loan origination activity. Such violations could subject both the acquiring lender and the individual mortgage loan originator to penalties and enforcement," New American said in a statement.

The technology roadmap for combining companies goes well beyond the customer-facing aspects of the business. New Fed Mortgage, which in January expanded its footprint into Pennsylvania with the acquisition of direct lender Commonwealth Mortgage sees M&A as "a way for us to build our footprint outside of New England and become more of a national type of play," Brian D'Amico, New Fed Mortgage's president, said in an interview.

D'Amico said New Fed's technology capability allowed it to "mirror" Commonwealth's compliance, templates and systems in states where New Fed didn't have a prior presence.

The expansion also forced New Fed to think about how to brand itself across its markets. It will rebrand Commonwealth to New Fed Direct in locations where it lacked a retail presence and is considering setting up DBA entities to handle originations in New Fed's preexisting markets to avoid competition between its direct and retail divisions.
Notable deals
Power lies with the people
Ultimately, the success of many deals comes down to how well the company brings its people together.

In the case of Movement Mortgage's transaction for Eagle Home Mortgage, Bowles said, "We were originally introduced to this group and found out they were for sale as a result of trying to recruit some of their folks.

"Some of that was because we could see a good cultural fit between the two companies. It seemed to make sense for us to participate in the sales process because we could keep people together and get a larger group over," she said. "The people are the most important part of the deal. If you can bring the people on, the rest of it falls into place."

Retention risk is always present and it's inevitable that some staff will balk at change, said Rick Arvielo, CEO of New American Funding. New American bought Marketplace Home Mortgage in December 2018.

"The fear is: are the people gonna come and are they gonna stay? You're buying a company and people have a choice," Arvielo said.

"In this market, these agents are getting recruited like mad anyway. A lot of them are talking to other options and all of a sudden something like this gets sprung on them. As the acquirer, that's scary. You're gonna write a check and not know if you're getting a return on that investment."

Understanding how the two companies' compensation schemes compare is key. "That was the first thing we spent time vetting. We reviewed their rates and there were only little differences with the way we do things compared to the way they did things," said Arvielo. "It would have made it a lot more difficult if all of a sudden we were like, 'Hey, you're now working for New American Funding and you're taking a 30% pay cut.'"

While New American's acquisition of Marketplace did lead to the loss of a four-person group, it retained the vast majority of Marketplace's originations team. Citizens did its due diligence on compensation as well, leaving pay unchanged for the new colleagues. Citizens' benefits package — which gave the incoming staff a better plan for less cost — transitioned over after the calendar changed to 2019.

The Farmers Exchange employees moving under Gateway's benefits umbrella are working under a longer buffer period that won't finalize until January 2020.

None of this suggests every deal is painless for employees.

Both New American and Citizens Bank took out redundancies in the corporate back office, legal and administrative positions, totaling a handful of terminations in both cases. And for companies being acquired — especially small ones — it's hardly a given that even customer-facing staff are spared.

"The experience for the employee or loan officer aren't always going to be that good. That's more likely to be the case with the larger institutions," Stephen Curry, CEO of Gateway Mortgage, said in an interview. "They have a tendency to say, 'This is our way. You get on the train when we leave the station or you're not on.' That's something for the employees going through this experience to be thinking about. What am I going to be dealing with here and how do they approach their employees and clients?"