At the IMN Residential Mortgage Servicing Rights Forum last week the issues of liquidity and the outlook for mergers and acquistions (M&A) came up.
Liquidity is something that many of the CEO’s are focused on. Aaron Samples, CEO of First Guarantee commented “ Where the last cycle was credit driven more than anything else, for this cycle it’s going to be liquidity that shapes the market”.
Right now the bigger players access to liquidity seems pretty easy to get. For the small players things can be a bit more difficult. Wherehouse lenders, debt deals and equity sales have all proven to be ways to access capital. According to Kevin Brungardt, CEO of Roundpoint Mortgage Servicing Corp “Liquidity isn’t an issue from the debt side. A few years ago we did an MSR advance facility. We could only get conventional products at 6.5% LIBOR. It was standard leverage. We refinance last summer. We put in conventional and Ginnie Mae, primarily at the same advance rates, and doubled the size. We were nearly three times subscribed. But be careful with the leverage. When rates die 50 basis points, as an independent you have to make sure you have the liquidity to cover those margin calls as soon as you get them. And I think people fall in love with that leverage. The equity side is a bit more difficult. We did a preferred offering last year for about a 21% interest in the organization. We were able to place that as well, but it proved a little more expensive that the previous leverage on the MSR rights.”
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Chris Mayer, CEO, Longbridge Financial; Kevin Brungardt, CEO Roundpoint Mortgage Servicing Corp, Aaron Samples, CEO First Guaranty Mortgage Corp; Lee Smith, EVP/COO Flagstar Bank.[/caption]
As for the M&A opportunity on the originators side, the feeling is that a good amount of M&A is going on, even though the pricing isn’t quite where some would want it to be to get a deal done. There are companies that are looking to do some opportunistic buying and looking at how best to structure a deal. How to structure isn’t always what drives the deal though. According to Lee Smith, EVP/COO of Flagstar Bank “I’m a big believer that the deals that get done are about the people involved. If there is a desire on the part of the people involved to get a deal done, and the deal works for both parties, the deal will get done.
Excess capacity might drive M&A on the servicing side. “It’s always a difficult balance between does the platform make sense, does the asset make sense, is it strategic and are there synergies to be had. I think your going to see big deals coming to market” said Mr Brungardt. “ I think people continue to need scale to make sense, to get the return out of the business that they need. There have been tailwinds with interest rates in the last quarter and that gives people hope, but hope is not a great strategy. I think we have had more productivity in this space that we ever had in the past and with that productivity comes overcapacity. So I think it’s important to understand that we are using AI, we are using robotics, we’re using offshore labor and we are using more technology. This all creates more capacity. So I think there is overcapacity and there needs to be more M&A, especially on the servicing side.”
The reverse mortgage market has seen significant declines in FHA and Ginnie lending due to regulatory changes. This has lead to overcapacity in this sector as well. Chris Mayer, CEO of Longbridge Financial commented “ I think the sector would find a bit of consolidation would be valuable on the servicing/capital markets side. For originations there really is no big scale economies in the business. The folks with the originating capacity are trying to reduce it. So it’s not going to be consolidation as much as closing down some of the capacity. I think it would be helpful to see some M&A on the back side of the business.”
