Here’s a public service announcement for folks in Detroit: check to see if you should boil your water before you drink it.
Apparently drinking water problems are not confined to other areas of Michigan.
merger & acquisition news, Caliber Home Loans Inc. will be buying the
residential mortgage assets of Banc of California. After the deal goes through it will
reduce operating locations by more than 60 percent and total employees by about
half, leaving it with fewer than 950. The deal includes the leases related to
Banc of California's mortgage-origination offices. Bloomberg reported that,
"Annual run-rate expenses will drop by more than $150 million, and the bank
expects to book a one-time cost of about $4 million, per the filing.
Banc of California
has had its share of turmoil and bad press, with its former CEO Steven Sugarman
resigning in January when the company disclosed a probe by the Securities and
Exchange Commission. The sale is specific to Banc Home Loans, the Bank's retail
division. Portfolio Lending falls under the commercial division, so it's
"business as usual" with originations coming from its Wholesale and
Correspondent partners. The sale also includes a portion of the servicing
On the bank side of things, it has been
quiet recently. In the last week or so it was announced that Legence Bank
($304mm, IL) will acquire 8 IL branches with about $146mm in deposits from
MidCountry Bank ($797mm, IL).
by Bank Director finds the primary reasons bankers cite for walking away from
an M&A target are: price too high (64%), credit quality (54%), culture at
the target (49%) and regulatory concerns (17%).
what is important in maximizing value in an M&A deal? STRATMOR's Jeff
Babcock weighed in with his thoughts given
recent experience: there are still many more motivated, well-capitalized buyers
for retail origination platforms than there are such entities available for
continues to be a true 'sellers' market' for mid-size Independents. The
challenge for prospective sellers is not just attracting a buyer, but aligning
with the right buyer to optimize the sale execution of their company. We
believe that selling shareholders can (and should) proactively position their
organization to strategically fit with the most motivated buyers - and thereby
realize the level of economic value which reasonably satisfies their financial
expectations. Highly competitive bids from multiple
bidders will be realized where the seller scores high on
certain quantitative and qualitative criteria.
ability to achieve consistent Net Income margins and sustained profitability is
one of the most compelling value elements. By consistent, we mean profitability
which is not simply linked to origination market conditions with wide variances
between good years and bad years. Net Income margin is defined as the channel
profitability including all allocated expenses. For 2014, the MBA/STRATMOR PGR
Retail margin averaged 50 basis points across all mid-size Independents which
improved to 66 basis points in 2015. (Although full-year 2016 PGR data has not
been fully compiled as of this date, STRATMOR anticipates mid-size Independents
will once again report profit margins in the 60 to 70 basis point range.)
product mix, for obvious reasons, today's buyers are focused on (sometimes even
obsessed with) a seller's purchase business share - but not just for the last
six months. A consistently above-average purchase share demonstrates management's
commitment to building and maintaining referral sources over several years.
There is a sense that where this is the case, a lender's sales force will not
revert to refinance volume when there is a mini interest rate rally. A strong
purchase business culture eliminates some of volatility in the inherently
cyclical mortgage business.
next most impactful element of product mix is a prospective seller's government
lending share (inclusive of FHA, VA and USDA loans). It is generally assumed
that government originations generate higher revenues and margins than agency
conventional loans. The PGR average government share for midsize Independents
has been 40 percent for 2014/2015.
consideration is the share of jumbo originations. In contrast with government
products, jumbo loans generate significantly lower revenues and
are a drag on earnings. The PGR jumbo average for mid-size
Independents is four percent. Obviously, therefore, a significantly above
average jumbo share is generally a negative.
match and cultural compatibility are two
concepts thrown about loosely in M&A discussions, but they are both
absolutely critical to the success of an acquisition. Model match refers to the
fundamental style of doing business - branch network composition, originator
compensation structure, product focus, mortgage banking disciplines, etc.
culture is all about the effectiveness by which a lender deploys and manages its
human capital. An assessment of culture typically includes corporate values,
leadership style, strategic direction, management effectiveness,
communications, accountability, etc. While no two organizational cultures will
be exactly alike, they must be compatible. The history of mortgage banking
M&A is littered with examples of failed transactions which resulted from
culture clashes, many of which were probably avoidable if the parties made
cultural considerations a higher priority.
originator compensation plans is one topic
has assumed greater significance with the advent of Dodd-Frank and is often
among the first questions from a prospective buyer. Within this context, compliant means uniform commission
structures based entirely on volume with as few variations as possible. Any
commission arrangement that is tied to revenue levels is a doubtful plan.
Incentive compensation will also be reviewed in terms of possible exposure to
Fair Lending violations. Bank buyers are particularly sensitive to these issues
given the strategic importance of "reputation" and 'trust' across virtually all
also expressly prefer that a prospective seller has completed its transition of
originators to a non-exempt status such that they are eligible for minimum wage
and overtime compensation. More generally, changes to lender compensation plans
- especially changes to sales compensation - should be enacted prior to an
acquisition so that the seller's staff does not perceive that such changes were
implemented as part of the sale or initiated by the buyer. Where the buyer must
initiate compensation changes, it introduces uncertainties that are likely to
detract from value.
is often asked about whether the quality of the sales force matters. In every mortgage company sale, the
primary asset being acquired is the origination capacity, quality and loyalty
of the lender's field sales force. Sales force quality is typically measured in
terms of productivity, tenure/ turnover, age and concentration. A detailed
analysis of a lender's production performance provides an analytical assessment
of sales management effectiveness (recruitment, training, motivation,
accomplish this assessment by segmenting a client lender's sales force into quintiles
based on performance and then compare the metrics against the industry
population using our Originator
Census benchmarking survey
tool. Since the top
40 percent of originators typically account for about 80 percent of total
production, it is insightful to focus on these performers.
Often most of a client's turnover occurred in the bottom 40
percent of loan officers. And, since Originator Census data differentiates between voluntary
and involuntary terminations, we can glean a sense of how proactive a lender is
in clearing out low producers.
subjective in nature, there appears to be a correlation between management
effectiveness/tenure and financial performance ranking among PGR participants.
For example, management effectiveness should be assessed in terms of
leadership, strategic planning, employee satisfaction, accountability and
communications. Does the subject company bring a history of adapting to change,
innovation, creative utilization of technology, dependable management reporting
and cost controls? Mortgage
banking is a people business where 80 percent of expenses are related to
compensation. Management's ability to leverage its human
capital is therefore an indispensable skill.
about production momentum? Management's track record in improving market share
is the best measure of production momentum. Whenever feasible, STRATMOR
encourages clients to seek out local or regional market share reports. A
prospective seller that can demonstrate a consistent ability to gain market
share, irrespective of the industry cycle, is more valuable than lenders whose
volume tracks with the industry trends.
ability to earn respect and appreciation from counterparties, regulators,
borrowers and even competitors provide great comfort to a prospective buyer.
Investor Report Cards are one source of objective reputation assessment, as
well as systematic measurement of borrower satisfaction, e.g., STRATMOR's MortgageSAT Borrower Satisfaction Benchmarking program.
Jeff addressed management roles going forward. "Since a key element of an
acquisition's economics comes from eliminating redundant overhead and support
functions, the enthusiastic commitment to such actions by key seller
executives, who are most responsible for holding together the seller's
production organization, is a critical deal point." Thanks Jeff!
Interest rates for those
Although the data has been
solid what is moving rates now isn't necessarily economic news from a month or
two or three ago, but rather the series of speeches from the presidents of the
various Federal Reserve districts. There seems to be a coordinated message,
yesterday, for example, from the Fed's Harker, Williams and Dudley, that a
March rate hike is a distinct possibility. And if traders and investors think
rates are going to be higher in six months, or three months, the demand for
fixed-income securities tends to drop, and rates move higher - a
self-fulfilling prophecy. The odds
of a March 15 FOMC rate hike are now over 80%. We'll see what
Fed Chair Yellen says in her next speech Friday afternoon.
This morning we've had weekly
Initial Jobless Claims (-19k to 223k, lowest since 1973!). Coming up are the
ISM-New York Business Confidence Index (Feb), and the Treasury will announce
the auction sizes for next week's 3, 10, and 30-year auction. For numbers,
yesterday the 10-year note worsened, closing at a yield of 2.46%, and the
5-year Note and agency MBS prices worsened about .5 in price. This morning the move toward higher rates continues
with the 10-year at 2.47% and agency MBS prices worse a smidge versus last
Jobs and Announcements
Northpointe Bank is looking for a qualified individual to join its senior leadership team as the CFO. The bank, recognized as one of the top performing banks in the country, has a strong focus on mortgage lending, and is a Fannie Mae, Freddie Mac and Ginnie Mae approved lender. The candidate must have extensive experience with the accounting aspect of both banking and mortgage lending along with a proven ability to plan, develop, organize, implement, direct and evaluate the organization's fiscal function is imperative. If interested, please forward a resume to Sheri DuChemin, VP Human Resources (616-974-8490).
According to the most recent ARMCO Mortgage QC Trends Report, in Q3 2016, as in the previous two quarters, Legal/Regulatory/Compliance defects were the major driver of the overall defect rate as lenders continued to make adjustments in the implementation of TRID requirements. Some highlights include: The benchmark Critical Defect Rate drops to 1.27%, supporting a downward trend after reaching a high of 1.92% in Q1 of 2016; Overall defects associated with the Legal/Regulatory/Compliance category jump by over 14%, however, critical defects within the same category drop to a 12-month low, comprising 22.69% of all critical defects due to changes in lender severity ratings are the cause of this decrease; Critical defects associated with Income/Employment lead all categories for "Credit Related Defects". The top reported critical defects are all associated with the miscalculation of income. Access the full report here.
For brokers, "Great news to get your business kick started in March. Carrington Mortgage Services, Wholesale Lending has made the process easier and the experience better for its brokers with the following changes: First, management is removing automatic appraisal review for conventional loans, and eliminating automatic VOD requirements for purchase and refi loans. All 4506T requirements are being revised based on AUS. Finally, pre-closing VVOE on Streamline & VA IRRRL loans were removed. These are just a few of the changes made recently in Carrington's ongoing effort to become easier to use and with a commitment to their 'under-served' strategy!" Brokers new to Carrington should contact Matt Evans, VP Sales West, (949-517-6033) or Sam Bjelac, VP Sales East, (410-603-8053).
Jim McCarthy, a founding member of the CFPB and expert on the complaint process, announced that he will be helping companies navigate the complex world of corporate complaints. Jim will be leaving PennyMac to hold a series of seminars through InsideArm.com in March and April designed to help businesses navigate the pending CFPB complaint intake, and Company Portal changes. He also wants you to contact him if you need any help with the CFPB complaint process or technology. To register for the seminars, click here.