The National Association of Hispanic Real Estate Professionals (NAHREP) has published its 2015 report identifying the top 250 Latino mortgage originators in the U.S. Wells Fargo had the most mortgage originators on the list, followed by New American Funding and Alterra Home Loans. To determine who ranked among the top, a compiled list of self-nominations reflective of total transaction closed in 2014 are verified and reported. The NAHREP report, sponsored by Radian, highlights the importance of incorporating Hispanic and Spanish-speaking loan originators within the industry in order to connect with the Latino community.

Everyone was talking about this announcement yesterday. "The Consumer Financial Protection Bureau (CFPB) Director Richard Cordray issued the following statement on the Know Before You Owe mortgage disclosure rule: 'The CFPB will be issuing a proposed amendment to delay the effective date of the Know Before You Owe rule until October 1, 2015. We made this decision to correct an administrative error that we just discovered in meeting the requirements under federal law, which would have delayed the effective date of the rule by two weeks. We further believe that the additional time included in the proposed effective date would better accommodate the interests of the many consumers and providers whose families will be busy with the transition to the new school year at that time.' The public will have an opportunity to comment on this proposal and a final decision is expected shortly thereafter."

Somewhat lost in the excitement was an announcement by the OCC that several large banks are now restricted in their mortgage practices. "HSBC and Wells Fargo will be barred from acquiring any new mortgage servicing rights from other banks... JPMorgan, Santander, U.S. Bank and EverBank will be able to acquire new rights only with advance approval of regulators." Correspondent clients fear not, since the actual order states that it "does not apply to servicing associated with new originations or refinancings by the banks or contracts for new originations by the banks."

Banks know a thing or two about buying and selling MBS, and also about buying and selling each other! SNL Financial reports that the average price to tangible book value for bank and thrift acquisitions nationwide was 1.50x through Q1. That compares to 1.41x (2014); 1.24x (2013); 1.19x (2012); 1.09x (2011); 1.19x (2010); 1.15x (2009); 1.71x (2008); 2.30x (2007); 2.44x (2006) and 2.29x (2005).

Speaking of which, over the last week or so we've seen plenty of M&A announcements. In Connecticut Liberty Bank ($3.9B) will acquire Naugatuck Valley Savings and Loan ($509mm) for $78mm in cash. In Alabama Oakworth Capital Bank ($330mm) will acquire independent trust company AlaTrust Inc. - AlaTrust provides wealth management for clients. Bank of Blue Valley ($617mm, KS) will acquire 1 KS branch from The Federal Savings Bank ($308mm, IL) - the branch has $37mm in deposits. In Massachusetts Scituate Federal Savings Bank ($293mm) will acquire S-Bank ($199mm). In the Armadillo State WestStar Bank ($1.1B) will acquire First National Bank ($338mm). In Kansas Almena State Bank ($34mm) will acquire The Farmers State Bank ($24mm). City National Bank of West Virginia ($3.5B, WV) will buy 3 branches in KY from American Founders Bank, Inc. ($293mm, KY) for a 5.5% premium. The branches have $164mm in deposits and $125mm in loans. North Shore Bank, a Co-operative Bank ($670mm, MA) will acquire Merrimac Savings Bank ($74mm, MA). Choice Financial Group ($942mm, ND) will buy Northland Financial ($197mm, ND).

Continuing along this M&A vein, this from Jeff Babcock, managing director of STRATMOR writes,

"Merger and Acquisition activity in the mortgage banking sector has clearly accelerated over the last 18 months. Sellers have usually been midsize independent mortgage banks while buyers have included both larger independents and regional banks. Virtually all of the transactions, however, with which STRATMOR is familiar have been traditional acquisitions: that is, a buyer acquires the assets or the stock of the selling lender and typically consolidates some or all of the corporate support functions into the buyer's organization which is the surviving entity.

So why have we not seen any mergers? Could mortgage company mergers be more strategically attractive (than a company sale) and operationally feasible for a select number of independent lenders? The distinct properties which define a merger include reasonably similar production scale, comparable company valuations and the willingness of the respective owners to check their egos at the door. Since there is probably no such thing as a true "merger of equals," the theme here is to approximate a marriage where equality rather than dominance is the intention of both parties. The strategic objective of a merger is to create a mortgage bank with greater critical mass of origination volume, stronger Balance Sheet, competitive differentiation, perhaps production channel diversification and functional efficiency.

From STRATMOR's perspective, the likely merger parties are both successful mortgage banks with similar track records of solid financial performance, growing production volume, proven management teams and excellent counterparty reputations. There are at least dozens, if not more, of independent mortgage banks that would meet the above performance criteria to qualify as prospective merger candidates. Conversely, we do not believe that it would make sense for two weak sisters to combine as a means to solve their respective operating or management deficiencies. In such cases, bigger is not likely to be better.

Perhaps mortgage banking executives have simply not considered a merger as a viable strategic option. But the more compelling answer is an absolute requirement to structure the combined organization for the greater good, thereby eliminating ego-driven and self-serving considerations.  And the entrepreneurial nature of the typical mortgage company ownership makes this a monumental challenge.

STRATMOR's experience confirms that mortgage company CEO/owners are highly independent operators with a risk-taking mentality and strongly held personal viewpoints. Their management styles have evolved from hands-on involvement in all aspects of the mortgage origination value chain... more trial and error than business school education.  The result is a level of self-confidence and pride of ownership which can make collaboration with peers more difficult and compromise even more elusive.

The feasibility analysis of a merger begins with a deep detailed assessment of the cultural compatibility between the two potential merging organizations.  We are not suggesting that the cultures must be the same, but they have to be driven off compatible corporate values and management styles.  The obvious risk of incompatible culture is Loan Officer defections and the departure of key fulfillment staff.

For a merger to be truly successful there can be only one leader, one capital markets group, one Loan Origination System and only one company name. Merging companies should resist the temptation to maintain two brands, thereby mitigating the marketing efficiencies of a single more powerful player. Even though the go-forward organization will be a much more powerful and competitive player, the merger process means that there will be perceived winners and losers across both organizations...so such ego-related issues probably explain why actual mergers are such a rare occurrence.

What are the fundamental tasks which must be undertaken to negotiate such a merger? The first step is to prepare parallel company valuations to determine the Enterprise Value of each lender. To assure objectivity, this task should be delegated to an independent experienced analyst with deep mortgage banking industry knowledge and M&A valuation skills. The second step is the most subjective and potentially most contentious: crafting the new organization chart with the selected managers assigned to the key leadership positions. If the two CEO's have not already identified the "anointed leader," then that decision must be made before proceeding with selecting the go-forward management team as well as the elimination of redundant functions: a critical step in achieving the scale economies through consolidation cost savings, but it can be the most painful process in that some good and loyal people will lose their jobs.

The final step will largely determine the outcome of a contemplated merger: collaboration between both organizations to develop the transition/assimilation plan to integrate the two organizations into a single powerhouse competitor which has successfully captured the best of both companies.  The attitude and spirit by which this integration is executed will establish the go-forward corporate culture.

The Mortgage Bankers Association application stats were released yesterday morning and showed that applications in the U.S. fell last week. So what? Yes, the supply of both agency MBS and Treasury securities is down which helps prices (since the Fed is still actively buying those fixed-income securities while at the same time residential production is down), but a fair amount of attention this week was diverted to news that Barclay's is exiting a portion of the US MBS market. (Remember that Royal Bank of Scotland did this a while back.) Barclays will still trade risk sharing bonds and might still trade agency paper, but they are out of the market making business in pre-crisis paper. And don't forget that Missouri's Stifel Financial Corp will acquire Barclay's US wealth and investment management unit for an undisclosed sum. The unit manages about $56B in assets and has 180 financial advisors.

But is the private label market coming back, at long last? Issuance of mortgage backed securities has increased to $32 billion this year from $18 billion last year. Much of this new paper is tied to rentals or distressed mortgages from the bubble years. To put the $32 billion into perspective, the private label market was $1 trillion before the crash. As far as new origination goes, pretty much only high quality jumbos are getting securitized, and even that is difficult as the banks prefer to portfolio these loans. We are still a long way from having any sort of robust non-conforming securitization market, but we are headed that way. 

Continuing with the markets, everyone continues to blather on about Greece, but in the U.S., citing an improving economy, the Federal Reserve signaled Wednesday it's on track to raise historically low interest rates as early as September, but that rates are likely to climb more gradually than it previously anticipated. Importantly, the Fed will continue to reinvest principal payments and Treasuries as they mature. And remember - the Fed sets U.S. short term rates, not long-term mortgage rates! After the announcement, which removed a little uncertainty from the markets, things improved and we closed the 10-year at a yield of 2.31% with a nice price improvement in agency MBS.

Jobs and Announcements

We've been speaking a great deal about the compliance costs in Retail, especially when well-capitalized firms that enter residential lending (a la Discover Financial Services) end up exiting about as swiftly as they came into it. Rick Roque, Managing Director of Retail for MiMutual Mortgage, writes, "Many retail branches simply attempt to find a company that is well capitalized but strong and innovative leadership is far more important. I can tell you that having a net worth of about $10M or more is essential for a non depository mortgage bank to expect to grow on a national scale - even this amount may pose challenges. But even more important than capital is strong leadership and this is reflected in the 'little things' within the retail operation. An innovative and yet compliant approach to Retail compliance, an entrepreneurial view of Accounting and the culture to invest in branches by acquiring the right products (with as few overlays as possible) are essential to the ingredients of a successful Retail Mortgage operation." To learn more about MiMutual Mortgage's retail group call 408.914.5895 or email Dr. Rick Roque. 

And Michigan Mutual is pleased to announce that industry veteran Al Crisanty has joined the company as Vice President, National Wholesale Director. "Al's 30+ year career successfully leading both sales and fulfillment teams makes him keenly aware of the necessity to execute a targeted sales strategy in tandem with operations. Under Al's leadership, Michigan Mutual's initial focus is the expansion of its national sales force and they are currently seeking Area Sales Managers and Wholesale Account Executives who desire to be part of building a wholesale-focused, mid-sized mortgage bank. (Michigan Mutual is a privately held, non-depository mortgage lender headquartered in Port Huron, Michigan. It is a direct Fannie Mae, Freddie Mac seller/servicer and Ginnie Mae issuer - currently licensed in more than 30 states.  For more information click on one of the above links above or contact Al Crisanty directly:  acrisanty@mimutual.com or 916-761-1624.  Let's talk!