Slideshow 7 fundamentals for buying a mortgage bank

Published
  • April 03 2017, 2:42pm EDT

It's a seller's market for independent mortgage banker acquisitions. Many nonbank lender owners are looking to cash out as they near retirement age, according to Stratmor Group, with the anticipated drop in refinance volume contributing to the pickup in activity.

For would-be buyers, acquiring an established organization provides an easier path for adding top-producing talent and loan volume, rather than recruiting workers piecemeal and growing organically, the advisory firm said.

Here's a look at seven fundamentals that sellers should concentrate on — and buyers should look for — when evaluating an acquisition.

Consistent cash flows

Sellers must have sources of profitability that are not dependent on market conditions. Net income margin is defined as origination channel profitability, including all allocated expenses. Having consistent margins shows that management practices pricing discipline and expense control.

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A strong purchase business

Today's mortgage company buyers are focused on, if not obsessed with, the purchase share of their target's production. "A strong purchase business culture eliminates some of the volatility in the inherently cyclical mortgage business," Stratmor said.

Large government lending share

Originations from the Federal Housing Administration, Veterans Affairs and U.S. Department of Agriculture mortgage programs average 40% of total volume for midsize independent lenders. Mortgage banks with a large share of these types of originations are more attractive to buyers because they generate higher revenue and margins than agency conventional loans, Stratmor said.

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Easy on the jumbos

"In contrast with government products, jumbo loans generate significantly lower revenues and are a drag on earnings," Stratmor said. Midsize independents average just 4% of their volume in jumbos. "Obviously, therefore, a significantly above average jumbo share is generally a negative."

Corporate culture matters

There must be a fit between the buyer and seller when it comes to corporate values, leadership style, communications and accountability. Failed M&A deals are often caused by culture clashes that could have been avoided if both parties in the deal made it a higher priority, Stratmor said.

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Compliant LO comp plans

A compliant compensation plan is one that has uniform commission structures based entirely on volume, with as few variations as possible, Stratmor said. A mortgage bank is "particularly sensitive" to this issue, because it looks to project an image of reputation and trust across all of its operations.

Sales force quality

A company is only as strong as its loan officers, their productivity and their loyalty. The top 40% of a company's loan officers originate 80% of the business, Stratmor studies have found. A deal's success could ride on whether those mega-producers elect to stay or leave.