“Rob, I’m no stranger to bribes.” (I am not going to say which mortgage banking production manager jokingly made that tongue-in-cheek statement.) We trust that Fed officials are not subject to bribes or political influences. A poll of 60 economists shows an almost unanimous expectation that the Federal Reserve will announce an interest-rate increase tomorrow. But a significant number of respondents expect only two further increases in 2019, instead of the three that were widely predicted in a similar survey in November.
Lender Products and Services
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Yes, the Fed is expected to raise short term rates again this week. Why? Recent economic data has been consistent with a moderate expansion as we approach the end of the fourth quarter. Payrolls increased by 155,000 in November and hourly earnings were up 0.2 percent. Unemployment remains very low at 3.7 percent. On the trade front, the US, Mexico and Canada signed a new trade accord known as USMCA and the US and China agreed to a temporary stay on the imposition of new tariffs. The ISM Manufacturing and Non-manufacturing indices both showed positive conditions in November. Yet new residential construction remains a cool spot as construction spending declined 0.5 percent and the months’ supply of new single-family homes continues to grow. Mortgage rates improved nearly 25 basis points, according to the latest Freddie Mac Primary Mortgage Market Survey and mortgage applications increased 2 percent due mostly to an uptick in refinance applications.
In the bond market, the same forces driving the weakness in stocks are pushing rates down. The U.S. 10-year closed Monday yielding 2.86% as Treasuries across the curve rallied after the NAHB Housing Market Index for December fell to its lowest level in nearly four years in the latest reminder of weakening housing data. Internationally, Australia lowered its 2018/19 GDP growth forecast, and lowered expectations for wage growth. South Korea lowered its GDP growth outlook for 2018 while the outlook for growth in 2019 was lowered as well. In Italy, officials have agreed on a deficit target for 2019, and will reportedly lower its 2019 GDP growth forecast to 1.0% from 1.5%. The French National Assembly President acknowledged that France's budget deficit in 2019 will exceed the EU's 3.0% limit in 2019 but is expected to be a cyclical peak rather than the trajectory. Finally, British Prime Minister Theresa May confirmed that the parliamentary vote on the Brexit withdrawal bill will take place during the week of January 14.
In the good ol’ US of A, today’s economic calendar began with November housing starts and building permits. +3.2% (driven by multi-family, single-family numbers were actually down, and +5%, respectively, although both were expected to decline from their respective previous readings. Most importantly, day one of the FOMC two-day meeting kicks off at 1:00pm. The Fed is expected to raise the Fed funds rate 0.25% tomorrow. We begin today with the 10-year yielding 2.83% and Agency MBS prices are better than Monday night by .125.
M&A and Business Moves
First, let me clarify a story that broke last week regarding a settlement between Gateway, the U.S. Government, and Finance of America (FAM). (The action is related to mortgages originated prior to Finance of America's purchase of Gateway Funding in 2015.) This is Gateway Diversified. It has nothing to do with Texas’ Gateway Mortgage Group, LLC.
There’s no doubt about it—consolidation in the industry is increasing. In an article in the December issue of STRATMOR Group’s Insights report, “Something’s Got to Give: Lender Options for Navigating the Mortgage Industry Shakeout,” Senior Partner Jim Cameron reports on the big jump in M&A activity from 2016 to 2018. And, he predicts there will be even more M&As deals in 2019. “These are tough times in the mortgage business,” says Cameron. “Industry indicators signal a down cycle, and lenders who are well-capitalized and well-run have an opportunity to be ‘consolidators,’ even while struggling lenders face the prospect of becoming reluctant (if not involuntary) ‘consolidatees’.” While conditions are challenging, Cameron says there are several tactics and strategies lenders can pursue and he outlines the pros and cons of eight possible lender options.
(In a second article in the report, “The Borrower Experience: Is This Simple Mistake Costing You $200,000 a Year?” MortgageSAT Director Mike Seminari shows the steep cost of asking borrowers for the same document multiple times. December 2018 STRATMOR Insights Report.)
Middletown Valley Bank ($429mm, MD) will acquire residential mortgage lender Millennium Financial Group for an undisclosed sum. Millennium offers loans to homebuyers throughout the Mid-Atlantic region.
And it appears that one of the largest lenders in Atlanta is being acquired. Ameris announced the acquisition of Atlanta-based Fidelity Southern/LION, which is ABCB's (Ameris Bancorp) largest deal yet. LION's $4.8 billion-in-assets, with a portion in residential mortgage, represents a notable 30% of ABCB's $16.2 billion in pro forma assets. The deal is expected to be mid-single-digit earnings accretive to '20E with under 3% TBVPS dilution, earned back in roughly 2.5 years. This 100% stock deal is worth $751 mm in total or $27.22 per LION share considering the 0.8x exchange ratio. This is a 27% premium on LION's previous closing price and represents 1.76x TBV, 17.5x KBW's ‘19E, 15.5x KBW's ‘20E and an 8.8% core deposit premium. Deal closing is expected in 2Q19.
On the depository banking side of things, M&A continues as well. Research by S&P Global Market Intelligence finds that as of mid-October (10/17), there had been 209 bank deals completed or about 1 deal every 1.4 days or so this year, which, if projected through the end of the year, would be about 263 deals, roughly average when compared to the prior three years of 260 deals. When it comes to pricing levels, the data shows an up-tick however. Through this same mid-October period, the median deal value to tangible common equity was a reported 1.71x. If that holds or improves, it is poised to be better than both the 1.60x level reached for 2017 and the 1.31x level of 2015.
Just in the last three weeks it was announced that…
In California, United Business Bank ($1.3B) will acquire Uniti Bank ($344mm) for $63.9mm in cash (57.6%) and stock (42.4%) or about 1.37x tangible book. In Illinois First Midwest Bank ($14.9B) will acquire Bridgeview Bank Group ($1.3B) for $145mm in cash and stock or 1.30x tangible book, and SENB Bank ($219mm) will acquire Gateway Community Bank ($90mm) for cash. Cambridge Trust Co ($2.0B, MA) will acquire Optima Bank & Trust Co ($524nnm NH) for $67mm in cash (5%) and stock (95%) or 1.91x tangible book. In Texas Alliance Bank ($740mm) will acquire The First National Bank of Mount Vernon ($189mm), and Spirit of Texas Bank ($1.1B) will acquire The First National Bank of Beeville ($412mm) for $63.7mm in cash (51%) and stock (49%) or about 1.78x tangible book. People's United Bank ($44B, CT) will acquire Belmont Savings Bank ($3.0B, MA) for $327mm in stock (100%) or 1.6x tangible book. In Iowa FreedomBank ($267mm) will acquire Farmers and Merchants Savings Bank ($158mm). CenterState Bank ($12.3B, FL) will acquire National Bank of Commerce ($4.1B, AL) for $850.4mm in stock (100%) or about 1.99x tangible book. Lastly, Faciam Holdings Inc. will acquire Summit Bank ($281mm, CA) for $56.13 per share in cash (100%).
Jobs, Business Opportunities, and Promotions
A multi-state retail and wholesale direct to consumer group is coming on the market for purchase. The group is profitable, expected to fund $2.0B in volume is 2018, and includes sales, ops and management. Ideal acquirers will be well capitalized, have a broad suite of agency products, and solid technology. Email me to forward confidential notes of interest, principals only please.
Summit Mortgage Corporation continues to expand nationally and is looking for “Top Sales and Sales Leadership talent.” Summit is a privately-held, well capitalized, retail lender headquartered in Minneapolis, MN. “Since 1992, we’ve been helping originators meet their client's needs by providing all of the advantages of a large company with the entrepreneurial spirit of a startup. We are lean on layers and deep in capabilities; including full technology and marketing suites. Originators have direct access to in-house support teams which enable them to exceed client expectations and build their businesses. Innovative service offerings like our $10,000 Underwriting Guarantee set us apart from our competitors and give our referral partners the confidence their loans will close. If you are looking to work with an agile team that will execute on your behalf contact us at HR@Summit-Mortgage.com. Visit us at www.joinsummitmortgage.com.”
“Will robots take your job? It’s no secret that the most crucial component of the Mortgage process is the Loan Originator. But according to online studies, LOs have an ‘Automation Risk Level’ of, ‘You are doomed’ (or 98% probability of automation). Many Originators are finding the pace of advancing technology is making it harder for them to remain relevant in the customer’s mind. Canopy Mortgage provides a solution for Loan Officers to harness technology/automation while highlighting the value of having a relationship to back up the transaction. Do LOs have a brighter future than WillRobotsTakeMyJob.com is suggesting? We think so. Unless of course, programmers end up building tech that actually ‘cares.’ Until then, Canopy Mortgage is expanding its national base of tech savvy-human LOs. Check out our business model that provides LOs with better pricing and technology and see why so many loan officers are leveraging their digital storefront. Reach out to Josh Neumarker at Canopy Mortgage for more information.”
“GSF Mortgage Corporation is pleased to promote our Direct Originator Partnership Program for originators who are interested in a low expense and best execution opportunity in today’s market, while playing a critical role in delivering an exceptional customer experience during every step of the home lending journey. The program has no branch or lender fees, translating to better pricing and compensation for the originator. With access to management, technology, and a comprehensive set of products, we give you the tools to succeed and help you build solid and long-lasting relationships and engage all customers in a positive manner, ensuring the customer's best interests are your number one priority. Originators participating in this partnership have enjoyed a 28-percent production increase, all while operating in a challenging market. Please reach out to VP of Retail Lending, Frank Papaleo.”