Twenty years+ years ago I was operating a savings and loan backed wholesale mortgage bank that was on the brink of shutting down. Regulators had altered capital regulations and the S&L's owners were not willing to pony up additional funds to meet new reserve requirements. At this time, the company I operated was originating around $50M per month via third party originators. We were generating around 50 bps of profits. Knowing that I was about to lose my balance sheet and warehouse line, I quickly networked to find a financial partner that would provide the capital needed to keep operation open.
Lucky for me I found a commercial bank that saw my mortgage lending business as an opportunity and they decided to partner with me. Unfortunately, my investor approvals were with the S&L and my new partner did nott provide me a warehouse facility. They did however agree to share $800K in core capital and $1.2M in subordinate debt to create my balance sheet.
My deal was simple: The bank provided all the capital at a 12% couple rate and we split the earnings and ownership 30/70. I obtained 30% of earnings and ownership through options without contributing any capital. I provided the staff, systems and clients. I also had to find a warehouse bank and obtain FHA, FNMA and FHLMC seller/servicer approvals.
It was a sweet deal for me and my partner. After 5 years, our operation had retained a servicing portfolio of $1.5 billion and all parties involved were enjoing comfortable profit margins.
Why am I telling this story?
Over the past year several private equity groups employed our services to help them inject investments into existing mortgage companies. Their criterion is very simple. The operation must be profitable already but motivated to grow. The lender must have all key approvals and warehouse relationships in place. Top priority went to mortgage shops that were only in need of additional capital.
While a well-established mortgage company might be able to grow their balance sheet organically, it can take a long time, causing them to miss out on opportunities today. For the mortgage bankers who fit the mold of these equity group's investment targets, this is the opportunity of a lifetime. But without capital to obtain agency approvals, increased warehouse lines, and access to broker dealer salesman (hedging), most companies won’t be able to exploit these opportunities today.
Raising capital comes with a cost and the cost can be expensive. But, if a liquidity injection can help you increase the rate of return you see on your invested capital, it should be layup decision for any mortgage bank owner.
Twenty years ago I partnered with a bank that provided the capital for my company and grow my $50M per month to $150M per month in originations. The capital helped generate profits and intrinsic value for me and my partner. During the five year partnership, the pecuniary rewards were spectacular for both of us.