The document discusses consolidation trends in the US mortgage banking industry. Long-term growth is expected through mergers and acquisitions as participants look for ways to cut costs and remain competitive in the face of regulatory pressures and uncertainties. Various factors are impacting the industry such as interest rates, Dodd-Frank rules, and potential disruptions from financial technology companies. M&A activity is expected to continue accelerating as smaller players are unable to achieve economies of scale.
Borrowing costs for middle-market debt issuers generally declined during the third quarter, despite a modest increase in leverage levels and little change in benchmark rates. The Fed, as expected, left benchmark interest rates unchanged in the third quarter, but did announce a program to gradually reduce its balance sheet from $4.5 trillion (a result of recessionary quantitative easing) to $3 trillion over the next three years. Thus, the prevailing combination of low borrowing costs, high leveragability and a generally benign default rate outlook, presents an attractive backdrop for issuance. This "perfect storm" of market conditions provides a compelling (albeit narrowing) window for middle-market issuers.
Corporate borrowing activity in the second quarter was robust, particularly in the middle-market, which exceeded the record volume seen in the first quarter. Supply and demand for middle-market credit became more balanced, as opportunistic issuers came to market and/or increased issuance size. Near team market conditions remain compelling for middle-market issues as borrowers are capitalizing on strong institutional appetite by pursing favorably crafted deals for acquisition, recapitalization and growth financing.
Capital Markets Insights – Late Fall 2018Duff & Phelps
What’s been an increase in growth and acquisition-related financings and recapitalization transactions? Read the fall edition of Duff&Phelps’ Capital Markets Insights.
Borrowing costs for middle-market debt issuers generally declined during the third quarter, despite a modest increase in leverage levels and little change in benchmark rates. The Fed, as expected, left benchmark interest rates unchanged in the third quarter, but did announce a program to gradually reduce its balance sheet from $4.5 trillion (a result of recessionary quantitative easing) to $3 trillion over the next three years. Thus, the prevailing combination of low borrowing costs, high leveragability and a generally benign default rate outlook, presents an attractive backdrop for issuance. This "perfect storm" of market conditions provides a compelling (albeit narrowing) window for middle-market issuers.
Corporate borrowing activity in the second quarter was robust, particularly in the middle-market, which exceeded the record volume seen in the first quarter. Supply and demand for middle-market credit became more balanced, as opportunistic issuers came to market and/or increased issuance size. Near team market conditions remain compelling for middle-market issues as borrowers are capitalizing on strong institutional appetite by pursing favorably crafted deals for acquisition, recapitalization and growth financing.
Capital Markets Insights – Late Fall 2018Duff & Phelps
What’s been an increase in growth and acquisition-related financings and recapitalization transactions? Read the fall edition of Duff&Phelps’ Capital Markets Insights.
FICCI IBA Bankers' Survey (July - December 2017)Nitine
For the forthcoming Union Budget, banks demand full tax deduction on the NPA provisioning; reduction in corporate tax rate; and accelerated investments in infrastructure sector
Client Alert: Brexit - The Impact on Cost of CapitalDuff & Phelps
On June 23, 2016, the United Kingdom held a referendum to decide whether to leave or remain as member of the European Union (EU). Against prior poll prediction, 51.9% of U.K. voters were in favor of leaving the EU, while 48.1% voted to remain a member. This decision is popularly known in the financial press as “Brexit”.
To assist in this discussion, on July 12, 2016, Duff & Phelps held the second of its Brexit webinar series entitled “The Impact on Cost of Capital,” featuring a panel of world-renowned cost of capital experts. The webcast focused on the challenges of estimating the cost of capital from the perspectives of U.S., U.K., and Eurozone investors in a post-Brexit world.
Now in its third year, Duff & Phelps' Global Enforcement Review provides analysis and commentary on global enforcement trends in the financial services industry. To compile this report, we studied published data released by the UK Financial Conduct Authority, the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission, the U.S. Financial Industry Regulatory Authority, and the Securities and Futures Commission of Hong Kong in 2015 and recent years. We have also explored the enforcement trends specifically in various offshore jurisdictions in the chapter: The Changing Tides. As definitions and reporting standards vary across the authorities under review, certain data points may not be unilaterally comparable or available. We have nevertheless sought to examine figures from each regulatory body as indicative of wider trends in the global financial services industry.
How digital mortgage solutions can help win the war against margin compressionBoston Consulting Group
After a prolonged period of low interest rates, the 30-year fixed mortgage rate has risen, and is likely to stay at a higher level than we have seen for the last decade. Both bank and non-bank originators are feeling the impact, with originations, revenue, and profitability declining in line with historical patterns. Given these challenges, originators are looking for ways to sustain profitable growth and create a market advantage. This white paper addresses how mortgage originators can and are leveraging digital solutions across the mortgage value chain to address those market challenges.
Market conditions at the fourth quarter’s outset largely reflected expectations of continued (albeit modest) economic growth and accommodative monetary policy. At mid quarter, the presidential election portended a period of fiscal stimulus and tightening monetary policy. Overall, the quarter witnessed a sharp rally in equities, tightening credit spreads, a downturn in Treasury prices and a strengthening of the U.S. dollar.
Mercer Capital's Bank Watch | October 2020 | Low Rates and Tighter NIMs Spur ...Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
A stream of new money flowing into loan and credit funds overwhelmed new issue supply, providing issuers (and their agents) the opportunity to run robust offering processes and gamer attractive economic and structural terms. The recent tightening in monetary policy and strong macroeconomic conditions notwithstanding, all-in-cost of leverage has, thus far, remained near recent lows.
Mercer Capital's Value Focus: Auto Dealer Industry | Data as of Mid-Year 2020Mercer Capital
Mercer Capital's Auto Dealer Industry newsletter provides perspective on valuation issues. Each newsletter also includes a macroeconomic trends, industry trends, and guideline public company metrics.
In this edition of Valuation Insights we discuss retention incentives that are expected to become more mainstream under the new Trump Administration. The article discusses recent high profile cases, such as United Technologies recently announced deal to retain Carrier Corporation's furnace manufacturing facility in Indiana. The most common retention incentives are discussed in the article as well as best practices to improve your prospects for securing them.
Other Topics Covered Include:
• Goodwill impairment trends as highlighted in the Duff & Phelps 2016 U.S. and European Goodwill Impairment Studies • Duff & Phelps' Fifth Annual Transaction Trail Report on M&A and Capital Markets Activity in Southeast Asia • Delaware Chancery Court Case which utilized the Duff & Phelps Valuation Handbook Series as support for its conclusion that the respondent's expert's analysis was more reliable.
FICCI IBA Bankers' Survey (July - December 2017)Nitine
For the forthcoming Union Budget, banks demand full tax deduction on the NPA provisioning; reduction in corporate tax rate; and accelerated investments in infrastructure sector
Client Alert: Brexit - The Impact on Cost of CapitalDuff & Phelps
On June 23, 2016, the United Kingdom held a referendum to decide whether to leave or remain as member of the European Union (EU). Against prior poll prediction, 51.9% of U.K. voters were in favor of leaving the EU, while 48.1% voted to remain a member. This decision is popularly known in the financial press as “Brexit”.
To assist in this discussion, on July 12, 2016, Duff & Phelps held the second of its Brexit webinar series entitled “The Impact on Cost of Capital,” featuring a panel of world-renowned cost of capital experts. The webcast focused on the challenges of estimating the cost of capital from the perspectives of U.S., U.K., and Eurozone investors in a post-Brexit world.
Now in its third year, Duff & Phelps' Global Enforcement Review provides analysis and commentary on global enforcement trends in the financial services industry. To compile this report, we studied published data released by the UK Financial Conduct Authority, the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission, the U.S. Financial Industry Regulatory Authority, and the Securities and Futures Commission of Hong Kong in 2015 and recent years. We have also explored the enforcement trends specifically in various offshore jurisdictions in the chapter: The Changing Tides. As definitions and reporting standards vary across the authorities under review, certain data points may not be unilaterally comparable or available. We have nevertheless sought to examine figures from each regulatory body as indicative of wider trends in the global financial services industry.
How digital mortgage solutions can help win the war against margin compressionBoston Consulting Group
After a prolonged period of low interest rates, the 30-year fixed mortgage rate has risen, and is likely to stay at a higher level than we have seen for the last decade. Both bank and non-bank originators are feeling the impact, with originations, revenue, and profitability declining in line with historical patterns. Given these challenges, originators are looking for ways to sustain profitable growth and create a market advantage. This white paper addresses how mortgage originators can and are leveraging digital solutions across the mortgage value chain to address those market challenges.
Market conditions at the fourth quarter’s outset largely reflected expectations of continued (albeit modest) economic growth and accommodative monetary policy. At mid quarter, the presidential election portended a period of fiscal stimulus and tightening monetary policy. Overall, the quarter witnessed a sharp rally in equities, tightening credit spreads, a downturn in Treasury prices and a strengthening of the U.S. dollar.
Mercer Capital's Bank Watch | October 2020 | Low Rates and Tighter NIMs Spur ...Mercer Capital
Brought to you by the Financial Institutions Team of Mercer Capital, this monthly newsletter is focused on bank activity in five U.S. regions. Bank Watch highlights various banking metrics, including public market indicators, M&A market indicators, and key indices of the top financial institutions, providing insight into financial institution valuation issues.
A stream of new money flowing into loan and credit funds overwhelmed new issue supply, providing issuers (and their agents) the opportunity to run robust offering processes and gamer attractive economic and structural terms. The recent tightening in monetary policy and strong macroeconomic conditions notwithstanding, all-in-cost of leverage has, thus far, remained near recent lows.
Mercer Capital's Value Focus: Auto Dealer Industry | Data as of Mid-Year 2020Mercer Capital
Mercer Capital's Auto Dealer Industry newsletter provides perspective on valuation issues. Each newsletter also includes a macroeconomic trends, industry trends, and guideline public company metrics.
In this edition of Valuation Insights we discuss retention incentives that are expected to become more mainstream under the new Trump Administration. The article discusses recent high profile cases, such as United Technologies recently announced deal to retain Carrier Corporation's furnace manufacturing facility in Indiana. The most common retention incentives are discussed in the article as well as best practices to improve your prospects for securing them.
Other Topics Covered Include:
• Goodwill impairment trends as highlighted in the Duff & Phelps 2016 U.S. and European Goodwill Impairment Studies • Duff & Phelps' Fifth Annual Transaction Trail Report on M&A and Capital Markets Activity in Southeast Asia • Delaware Chancery Court Case which utilized the Duff & Phelps Valuation Handbook Series as support for its conclusion that the respondent's expert's analysis was more reliable.
Nederlandse consumenten krijgen in webwinkels vooralsnog weinig bezorgopties voorgeschoteld. Hoewel logistieke dienstverleners een breed scala aan serviceopties bieden, geeft nog geen kwart van de webshops consumenten keuze in bijvoorbeeld de dag of tijdslot van bezorging. Flinders laat zien dat een geoptimaliseerde logistieke checkout bijdraagt aan een hogere conversie en klanttevredenheid.
VOD Communications showcased mobile connectivity for transportation on 9th March at their offices in Centurion, South Africa. Bringing together managers and solutions engineers, “Connected Transportation” was the first in a series of planned networking events to present leading 3G/4G/LTE networking solutions to key industry players across a number of market verticals.
This first event highlighted rapid developments in transportation technology that are opening up new opportunities for mass transit networks, service fleets, and the emergency services. Advances in wireless technology mean that it is now possible to create in-vehicle wireless networks that allow fleet operators and first responders to operate more effectively and provide new levels of service to their customers.
A round-up of the latest UK economic news, including a reminder of the key announcements in George Osborne's Budget, inflation falling to 0%, the latest unemployment figures and David Cameron's comments about his re-election.
EY Global Market Outlook 2016 - Trends in Real Estate Private EquityThorsten Lederer 托尔斯滕
We are heading into new economic territory as 2015 draws to a close, and with this comes a new environment for real estate fund managers that have become accustomed to low interest rates and rising values. Many fund managers are lightly tapping the brakes given competition for deals, an abundance of debt and equity capital, and an awareness of the typical duration of a real estate bull market. What does this mean for the industry? Read more in this EY publication.
2018 has been a challenging year for commercial banks, with loan demand falling short of goals, spreads compressing and credit standards easing. Join us for this webinar, where Gita Thollesson, SVP of Client Success at PrecisionLender will provide a retrospective on 2018 and discuss opportunities for maximizing performance in the context of market realities as we head into 2019.
Municipal bond prices moved lower during the second quarter, as fears about the Federal Reserve tapering its stimulus program rattled the financial markets. While a handful of states still face some budget pressure for the remainder of their 2013 fiscal year, 45 states reported that they are likely to meet or exceed their revenue projections for fiscal year 2013. Interest-rate volatility and the longer term prospect of higher rates have reinforced our bias toward a more limited duration stance. We continue to overweight essential-service revenue bonds, as well as the A-rated and BBB-rated segments of the market. Our outlook calls for defaults to remain low and continued gradual economic recovery.
Mercer Capital's Investment Management Industry Newsletter | Q1 2021 | Focus:...Mercer Capital
Mercer Capital’s Investment Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
2014 Forecast: Entering the 2nd Half Of Market RecoveryEDR
Current stats on commercial real estate deals, metros to watch in the year year, lending trends and risk tolerance as we head into 2014.
Presented by Dianne Crocker, Principal Analyst, EDR Insight
EBA RMC monthly call, January 2014
AN INSIDE LOOK AT POLICY Increased Lending Boosts Money Supply Gro.docxgalerussel59292
AN INSIDE LOOK AT POLICY Increased Lending Boosts Money Supply Growth
FISCAL TIMES
Bank Lending Signals a Strengthening Economy
The financial crisis of 2008 rocked the foundation of the U.S. banking sector. The shock left banks short of capital and hesitant to lend, even as the recession cut deeply into loan demand. The Federal Reserve has pumped in an ocean of lendable funds, trying to prime the process of bringing banks and borrowers together. But many still wonder when, if ever, bank lending will return to normal.
We’re not there yet, but recent signs have been encouraging. Despite the sluggish economy, loan growth is finally beginning to pick up in key areas, reflecting both greater willingness to lend and increased desire to borrow. Loan volume of U.S. commercial banks rose at a one percent annual rate in June as expansion in business loans and non-mortgage consumer lending more than offset the ongoing contraction in real estate financing. It was the third consecutive monthly increase after steady declines for more than two years....
a Lending to businesses is leading the credit upswing. The volume of commercial and industrial (C&I) loans in the second quarter rose at a 9.6 percent annual rate, the largest increase in 2½ years. Banks have progressively eased lending standards for C&I loans to large and medium-sized companies for the past six quarters. Small companies have seen easier terms and conditions in each of the past four quarters. Economists expect to see signs that this loosening in standards is continuing when the Fed issues it third-quarter report from bank senior loan officers in mid-August.
More credit is starting to flow to small businesses, as well. That’s important, because small firms account for about half of U.S. job creation, and depend greatly on banks for credit, unlike large corporations that have the option to raise funds in the capital markets by issuing bonds. In the second quarter, the balance of banks reporting stronger vs. weaker demand for commercial and industrial (C&I) loans by small businesses was positive for the first time in five years, according to the latest Fed survey. Another positive sign is the gradual rise in C&I loans made by small banks, whose customers tend to be small local companies. Small-bank C&I loan volume has been rising gradually in 2011 after hitting bottom late last year.
Despite increased attention by policymakers over the past year to the dearth of small business lending, the problem has been not so much banks’ unwillingness to lend but simply a lack of loan demand, reflecting weak sales. Although the percentage of small companies saying credit is harder to get is still somewhat higher than before the recession, it has fallen steadily over the past two years, from a peak of 16 percent, to 9 percent in June, according to the National Federation of Independent Business.
b Banks are also warming to consumer loans. Despite sluggish job markets, households have made great progress in g.
EY point of view - US mortgage banking M and A trends and outlook
1. Consolidation of the US mortgage industry continues
The amount of capital required and the cost to originate and service mortgage loans continues to rise due
to regulatory changes driven by Dodd-Frank and Basel III, and is further affected by prolonged low interest
rates in the US. Market participants looking to grow their businesses and maintain profit margins will need
to aggressively leverage new technologies and global labor sources. Long-term growth in a market with
stagnating volume is expected to be achieved through M&A activity.
• Non-bank mortgage originations have increased dramatically over the last few years. Non-bank lenders such
as Freedom Mortgage, Quicken Loans, PennyMac, Nationstar, PHH Mortgage and Loan Depot accounted for
over 45% of mortgages originated in 2015, compared to 13% in 2011.
• Given the low mortgage-interest rate environment and the rebound of the residential mortgage (RMBS) and
commercial mortgage-backed securities (CMBS) securitization markets since the crisis, and considering the
seasonality affecting housing activity, MBS issuance is expected to remain strong for the remainder of 2016
and 2017.
Long-term growth
in the US mortgage
banking market
is expected to be
achieved through
M&A. Various
participants are
looking for ways to
remain competitive
while navigating
pressures and
uncertainties, such
as the interest
rate environment,
Dodd-Frank rules
and potential
disruptions from
FinTech companies,
among others.
US mortgage banking
M&A trends and outlook
November 2016
Industry trends and outlook
• Interest rate environment — The spread between
the fed funds and mortgage rates narrowed after the
rate increase in December 2015. The long end of
the yield curve flattening, due to global headwinds
with large economies and recent news of Brexit,
has resulted in an increase in refinance activity.
• Margin pressure due to new rules — New mortgage
documentation requirements introduced by
Dodd-Frank led to an increase in the average loan
origination cost by 18% in the past two years,
according to the Mortgage Bankers Association.
• Loan volume stagnating — Total outstanding
mortgage debt declined from its peak of $14.8
trillion in Q4 2013 to its lowest point in a decade,
$12.5 trillion in Q1 2016. Due to increasing
operational complexity combined with decreasing
profitability, large and small banking institutions are
slowing down the origination of new mortgages;
however, refinancing activity has increased.
• Loan quality improves — The quality of loans,
on the other hand, continues to improve, with
decreases in charge-off rates to pre-crisis levels
of 0.08% in Q1 2016, compared to 2.85% toward
the end of 2009, indicating that the recovery
from the 2008-09 credit crisis continues.
• Housing demand — According to the Mortgage
Bankers Association, housing demand is expected
to surge over the next 10 years as an additional
14 million—16 million households will be formed,
primarily driven by baby boomers and millennials.
• Property valuation — According to the National
Association of Realtors, property values in the
housing market continue to rise nationally; the
average sales price of existing homes increased by
6.8% in the twelve months ending June 2016.
• MSR valuation — Interest rate volatility toward
the end of 2015 and Q1 2016 has significantly
affected mortgage servicing rights (MSR)
valuations in Q1 2016. Several banks reported
MSR valuation declines since Q4 2015. Industry
rankings indicate second-tier servicers and non-
banks increased market share in the mortgage
servicing space in Q1 2016, whereas overall
mortgage servicing segment growth was stagnant.
• Construction spending continues to grow — The
growth in overall construction spending is one
of the main drivers of the general profitability in
the mortgage industry and directly correlates
with low interest rates and economic growth
that stimulates the demand of new residential
properties. Annual spending on residential property
construction has increased from its low in 2011
to reach $5.0 trillion in 2015, with annualized
construction spend of $5.2 trillion through the
first four months of 2016. While residential spend
is still far below the pre-crisis high of $7.3 billion
in 2006, both residential and non-residential
construction are expected to increase further,
even under a higher interest rate environment.
2. 3 | US mortgage banking: M&A activity and outlook
M&A outlook
• Banking M&A — M&A is expected to continue
to accelerate as organic earnings per share
(EPS) growth challenges continue to persist
and the cost of capital is exceeding returns for
many players. Activist pressure is also seizing
on strategic and financial vulnerabilities.
• Loan portfolio acquisitions — Pressures
on top-line growth of banks from the low
interest rate environment are expected to
continue the momentum of loan portfolio
acquisitions, as seen in 2014 and 2015,
in order to achieve a boost in net interest
income, although the momentum may change
if interest rates begin to increase.
• FinTech as an opportunity to cut costs —
Streamlining the sales process through an
electronic documentation process may help
certain lenders lower their origination costs.
Developing these capabilities on one’s own
requires high capital expenditures and bears
risks of failure. Investing or partnering with
FinTech companies or acquiring a competitor
that possesses the desired digital technology
is becoming a more preferred option. Growth
of blockchain and the use of distributed
ledger may also help mortgage servicing
businesses lower their administrative cost
burdens.
• Asset acquisitions — Industry analysts
expect 2016 asset-based acquisitions to
surpass their 2015 levels. While deal activity
during the first nine months of 2016 has
been slow due to economic uncertainty,
mortgage portfolio acquisitions are expected
to increase during the second half of 2016
to surpass their 2015 levels, as various
mortgage lenders have publicly stated their
intentions as future 2016 and 2017 buyers.
• Industry consolidation — The bulk of the
deals in the mortgage space over the last
three years were strategic acquisitions of
small- to medium-size mortgage lending
businesses. High regulatory costs from new
lending and servicing requirements will
continue to force smaller and midsize market
participants, unable to achieve economies of
scale, to be takeover targets from their larger
competitors to maintain profit margins. The
need to consolidate will increase M&A activity
in the last three months of 2016 and beyond.
• REIT deal activity — 2015 and 2016 saw
high levels of REIT transactions, including
ten deals in the first nine months of 2016.
This consolidation trend in the REIT industry
may be impacted in 2016 due to the recent
Financial Industry Regulatory Authority
(FINRA) regulatory scrutiny on the growing
non-traded REIT market.
• MSR deal activity — MSR valuations
experienced impairments in Q1 2016 due to
the continued low interest rate environment,
which results in higher prepayments from
loan refinancings. This uncertainty has
led to a slowdown of servicing businesses/
MSR portfolio deals; however, this trend
is expected to reverse when interest rates
increase. REITs, however, may become an
attractive investment opportunity for various
investors as buyers look for safe havens
post-Brexit, especially if the adverse effects of
Brexit are long-term.
M&A activity
• 2015 and 2016 deal activity included various
mortgage and MSR portfolios, as well as
mortgage origination, refinance and servicing
businesses. The number of mortgage
business deals in 2016 has exceeded the
numbers in 2015, whereas the number of
portfolio acquisitions appears to have slowed
down. The first nine months of 2016 saw 24
mortgage business acquisitions, on pace to
eclipse the 21 deals that occurred in 2015.
• The number of mortgage portfolio deals
appears to be on a downward trend, declining
30.7% in FY15 and on pace for a further 56%
decline into FY16. CW Capital Management
and Nationstar Mortgage Holdings sold $2.3
billion and $1.1 billion from the sales of
their commercial and residential mortgage
portfolios in the first half of 2014, with
no similar large dispositions occurring in
2015 and the first nine months of 2016.
• Blackstone and its affiliates were active in
2015, making six acquisitions of mortgage
businesses and loan portfolios for a total
disclosed deal value of $8.6 billion.
• The increase in average deal size, excluding
GE Capital, was driven by two large real
estate investment trust (REIT) deals in
FY16, the $2.0 billion three-way merger
among NorthStar Realty, NorthStar Asset
Management and Colony Capital, as well
as Annaly Capital Management’s $1.5
billion acquisition of Hatteras Financial
Corp. and American Finance Trust Inc.’s
$1.0 billion acquisition of American
Reality Capital. These mergers echo a
previous trend of consolidation in the
REIT space experienced in 2015.
• Freedom Mortgage, one of the largest
nonbank mortgage lenders (originating
$36.8 billion of mortgages in 2015),
has made five acquisitions since 2014,
a sign of industry consolidation among
the largest nonbank lenders.
• The mortgage industry has seen little
capital markets activity, with no IPOs
being completed during 2015 or 2016.
Number of deals by deal type
Deal value by deal type
Mortgage
business
acquisitions
MSR
acquisitions
Mortgage
portfolio
acquisitions
3,9139M16
2015
2014
19,662
6,898
339M16
2015
2014
51
33
66
3. 4Driving the Capital Agenda — Transaction Advisory Services |
What you should know
Financing and Accounting
• Valuation implications — Mortgage
portfolio valuations are significantly
affected by duration, vintage (pre- or
post-crisis originations), mix of interest
rates (fixed vs. floating), expected
credit losses and prepayment rates.
• Repurchase reserve — Mortgage originators
possess a put-back risk of loans previously
sold to investors due to contractual reps
and warranties included within sold loans.
Upon breach, originators may be required to
repurchase the defective loan or indemnify
(or make whole) the investor or government-
sponsored enterprise (GSE). This requires
originators to record a liability for repurchase
reserves on the balance sheet, which may
be affected by the level of breaches and
quality of the underlying operations.
• Securitization accounting — Originated
loans are often grouped and sold to investors
in a securitization transaction, which
requires complex accounting guidance to be
evaluated for off-balance-sheet treatment.
Incorrect application of generally accepted
accounting principles (GAAP) could result
in consolidation of previously securitized
assets, eliminating any economics of
such securitization transactions from the
financial statements. Off-balance-sheet
treatment of securitizations is also based
on the assumption the transferred assets
are legally isolated from the transferor
(generally validated by a true sale opinion).
Tax
• Tax treatment of MSRs and loan origination
fees and any special elections (and whether
any excess servicing exists) or tax accounting
methodologies could have significant impacts
on the acquirer’s future tax obligations.
• REIT implications — Acquisitions of
mortgage businesses by REITs need to
consider the implications on its REIT status,
as REITs have certain tax qualification
requirements, such as asset portfolio mix,
types of income, information reporting
and withholding, distribution of earnings,
type and number of shareholders, etc.
Underwriting and Servicing
• Credit quality — Mortgage originators and
servicers are greatly affected by the credit
profile (e.g., prime, sub-prime, FICO score,
loan-to-value (LTV) ratios, etc.) of the
mortgage loan portfolios being acquired.
The mortgage loans or servicing rights
are also affected by overall economic
factors, such as interest rates, as they
affect prepayment speeds. Moreover,
a buyer should consider evaluating
whether credit policies and procedures
are in place and followed consistently,
and limit significant manual overrides.
• Cost structure — For mortgage
originators and servicers, the small
shifts in net costs to originate and
service loans can have significant impact
on overall business profitability.
• Servicing advances — Servicers advance
funds on behalf of delinquent borrowers
and also to repair, maintain and market
foreclosed real estate properties, which
may require additional financing. Excessive
shifts in level of servicing advances (or
long-dated balances) may also indicate a
deterioration in quality of loan portfolio/
borrower and strain a company’s liquidity.
• Underwriting practices — In early June
2016, Fannie Mae postponed the expected
new requirement that lenders must use
trended credit data when underwriting,
in an effort to make the home mortgage
market open to more consumers. This
potential additional regulatory change
should be considered with respect to
the underwriting processes and control
environment in a potential acquisition.
Separation and Integration
• Integration risks — Potential negative
borrower experience due to deterioration in
service levels during integration and related
changes to the borrower (e.g., payment
information changes, call center integration,
online services integration) should be
mitigated through adequate planning.
• Carve-outs — Acquisitions of mortgage
businesses that are commingled with parent
or other operations of a seller reduce
transparency and require an understanding
of interdependencies, shared services and
analysis of carved-out “deal-basis” financials.
For mortgage businesses, earnings can
significantly fluctuate due to various factors,
including the prevailing interest rates,
origination volume and gains on sale margins.
IT
• Mortgage businesses rely greatly on the
loan origination and servicing systems
that, if based on older technologies or
heavily customized, may pose risks to
updating, compliance and integration.
The IT environment may not have seen
adequate levels of investment, which may
require a buyer to increase one-time costs
to remediate systems or infrastructure to
address performance or risk issues. Clear
technology strategy for scaling-up systems
in growth periods will also be critical.
Regulatory
• Fannie Mae and Freddie Mac have extended
the deadline for mortgage lenders to comply
with the Consumer Financial Protection
Bureau’s (CFPB) new TILA-RESPA Integrated
Disclosure (TRID) regulation; however, TRID
requires lenders to significantly change
their business operations to maintain the
pace of lending activity. In addition to TRID,
compliance with other emerging/changing
rules, the company’s risk management
structure and compliance oversight,
effects of any litigation risks resulting
from foreclosure proceedings (including
robo-signing) and mishandling of escrow
accounts are important to consider.
Funding
• An understanding of future funding
commitments, relationships with lenders,
expected extension terms, capacity and
whether prepayment penalties exist are
critical for a mortgage origination acquisition
to continue to fund originations through the
company’s warehouse lines post-acquisition.
Human Capital
• Costly change of control payments
may become payable as a result of a
transaction, or loss of key personnel
could result in significant erosion of value
and create disruption to the business.
We have the right teams
that are made up of industry
professionals who have
worked together on significant
financial services transactions,
particularly in the mortgage
banking sector. These teams
have deep, hands-on experience
planning and advising on
transactions, including
assessing deal opportunities,
analyzing transactions from
both a strategic and tactical
perspective, helping set up
and optimize new operations,
restructuring and integrations.