“What do you call a gal who’s had too much to drink? A cab.” Of course, anyone who’s been drinking should stay away from California’s 40-foot waves. Drinking too much has its consequences, either when you’re doing it or the next day, and under the “Big Brother marches on at the expense of privacy” heading, in Brazil, Burger King says it's doling out "Hangover Whoppers," using facial recognition to determine whether you had too much to drink last night. Technology has strange offshoots. Google, thought to be tech but actually the world’s largest advertising company, owns the majority stake in Nevada’s Burning Man, held around Labor Day. There are strange things that have nothing to do with technology, of course, like the ownership of Napolean’s “staff of life.” (See how I slipped this in when everyone’s on vacation?) Today’s podcast can be found here, and this week’s is sponsored by Gallus Insights. Mortgage KPIs, automated at your fingertips. Gallus allows you to go from data to actionable insights. If you can use Google, you can use Gallus. For the final “interview” of 2023, Robbie answers questions about his life outside of mortgage banking.

Broker and Lender Software, Products, and Programs

Truv is now an approved third-party service provider supporting Freddie Mac Loan Product Advisor® asset and income modeler (AIM). Revolution Mortgage estimates that they can save up to $20,000 in cost on verifications with TRUV over competitors. "Let's talk about our documentation costs and those giant monopolies that are out there and laughing at customers and increasing prices because they have a particular monopoly. You want to lower your manufacturing costs” said Femi Ayi, EVP Operations. Contact TRUV today to discuss how we can help you with your income, employment, insurance, and asset verifications. Come join us!

Pop quiz: A national, mid-sized lender with 200+ originators wants to engage customers as soon as there’s at least a 50BPS benefit to the borrower, and they currently have a ~30 percent customer retention rate. If rates get down to ~6 percent, what percentage of their last 15 months of production would be eligible for a refinance? Over 55 percent, creating a potential risk of EPOs totaling $16M! With the Federal Reserve planning to cut interest rates in 2024 and 2025, have you thought about your strategy for maximizing refinance opportunities and mitigating the risk associated with costly EPO penalties? Total Expert Customer Intelligence can help boost your retention rates to ~75 percent and prepare to recapture refinance opportunities as rates trend down, avoiding millions in EPO penalties along the way! Check out our latest Expert Insights podcast for a deeper discussion about how the rate cuts will impact the lending industry.

To say this year has been tough might be a bit of an understatement. Still reeling a bit from the pandemic, our industry faced record high fed rates and growing inflation, all while still trying to stay competitive in the digital & AI economy. But this year is coming to an end, bringing a new year and a fresh start. Symmetry Lending is here to partner with you as you begin to build your plans and strategies for 2024. HELOCs continue to grow in popularity, and with Symmetry’s industry-recognized customer experience, record turn-times, exceptional guidelines, expansive offerings, and competitive broker fees who better to have as your HELOC partner going into the new year? Let’s make 2024 a great year together: Contact Symmetry today to get started!

Will M&A Continue Through 2024?

Is ego a reason that your company is still in existence? Many lenders tell me that they have cut things “to the bone,” but now what? Some have cut high producing branches after examining the net income of those branches. A lot of volume doesn’t mean a lot of profit. In a merger or acquisition, it is important to let the Agencies know about a potential change in control as soon as feasible and prudent, but more on that below. Meanwhile, mergers and acquisitions continue on, whether they are involving lenders or vendors.

MyHome™, a Williston Financial Group Company acquired Volly, a leading national provider of dynamic technology and marketing services for banks, credit unions, and mortgage lenders. Volly “has been providing cutting-edge technology and versatile, personalized marketing solutions for the nation’s largest lenders since its founding in 2004. Volly’s comprehensive marketing automation suite and exceptional creative services team help lenders capture and convert new business faster and retain customers for life. One-third of the nation’s top 30 banks currently work with Volly to capture leads, convert prospects, and retain customers with greater efficiency.”

CrossCountry Mortgage is buying AmCap Mortgage in Houston, a privately held nonbank that has funded just under $2 billion this year, per Inside Mortgage Finance. “Sources familiar with the transaction said a deal, in the form of an asset sale, has been reached and announced internally at both shops but has yet to be revealed publicly… One source, requesting anonymity, said he believes the owners will receive an earn-out based on the future production of the AmCap branches.”

Lenders tired of the rate volatility, the cost cutting, rates possibly trending higher with the Fed fighting inflation (until the Silicon Valley bank failure drove them down) may be looking at selling their company or merging it. “Valuing a Lender” was posted on the STRATMOR website.

STRATMOR’s M&A practice is on fire as big lenders have become small lenders, or brokers, and culturally paired lenders are wondering, “Why have two accounting teams? Two capital markets groups? Two underwriting staffs?” And so on. (Anyone interested in learning more should talk to David Hrobon or Garth Graham.) Of course, as has been mentioned in this commentary, larger lenders are also adept at simply hiring production staff away from smaller, thinly capitalized lenders.

Many owners of lenders around the nation are earnestly interested in making a decision about what to do with their company before a decision is made for them. I have received this question from a number of owners of small lenders. ‘Rob, is it only the lenders who have servicing who have any value? Or can small lenders with decent market share like mine have interest from buyers?”

Garth Graham replied. “Great question, Rob, and one we field nearly every day. We are hearing from lenders who are inquiring about the M&A space, and often try to find out what is going on and what they should do.

“The answer is that there continues to be good deals for potential sellers, and the reason is that there are a lot of buyers we work with who continue to want to grow market share in a down market. We closed three deals in the last 60 days, and all had upfront premiums with solid earn outs, with a good cultural fit for the parties. Often the premium being paid is driven by the ability for the seller to add the production without having to add all the corporate expense, so it can be painful decisions about the corporate depts (secondary, HR, Risk, technology etc.), but the end result is that the production is worth more to the buyer than it is to the seller due to the cost savings. And that shows up on premium offers. And the seller gets the balance sheet plus a share of that financial benefit. So, it can be a potential win-win. Of course, it has to be a deal that makes sense for the LOs, and production staff too, so that is why culture matters so much.” Thank you, Garth.

In valuing a company, a potential buyer will look at the audited net worth and the discounted cash flows, usually for the next three years of estimated earnings. (The devil’s in the details and assumptions!) The value to a potential buyer will depend on different factors, and the three main variables often used in an analysis are loan volumes, margins, cost structure, & profitability, and the current policies, procedures, & business model.

Of course, repurchase obligations are included, as well as existing or potential liabilities. Are there outstanding lawsuits? Is the buyer buying the entire company, or a percentage of ownership... a minority ownership has very little value. It is not a simple process, and making assumptions about the future is problematic. A thorough examination of these factors is where the value of a competent advisor shows itself.

Capital Markets

I haven’t been sure what day it is all week, but we’re finally at the end of it, and we have an abbreviated trading session to boot. Markets this week continued to price in aggressive rate cuts throughout 2024, despite the Fed’s latest dot-plot only calling for 75 basis points of easing in the latter half of the year. Pricing in fed funds futures contracts implies a nearly 75 percent chance that the Fed will ease rates by a quarter point in March.

Yesterday, bonds, which include those backed by mortgages, gave back price gains from earlier in the week as the market responded to weak demand during the day’s $40 billion 7-year note auction. The poor auction invited some additional selling that lifted yields toward their opening levels from Wednesday. After a tumultuous year, the 10-year bond yield is roughly unchanged on a year-to-date basis. Speaking of rates, Freddie Mac reported the 30-year PMMS recorded its 9th consecutive decline this week, to 6.61 percent. Since rates peaked in the latter part of October, the rate has fallen 118 basis points to its lowest level since 6.57 percent in the week ending May 25. Year-over-year, however, it remains up by 19 basis points and by 339 basis points above the beginning of 2022 before the Fed began hiking in March of that year.

In terms of economic data yesterday, the National Associatoin of Realtors reported that pending home sales in November remained the same as one month ago. Unfortunately, pending home sales dropped in all four U.S. regions compared to one year ago. The advance goods trade deficit widened to $90.3 billion in November from a revised deficit of $89.6 billion in October. Advance Retail Inventories were down 0.1 percent in November after decreasing a positively revised 0.1 percent in October. Advance Wholesale Inventories were down 0.2 percent in November after decreasing a revised 0.3 percent in October.

The final trading day for 2023 doesn’t have much going on with just Chicago PMI for December due out later this morning before a SIFMA recommended early close. That portends even thinner trading conditions, though there may be some month-end index movement. For those planning on an extra-long weekend, next week sees risk events ramping up with ISM manufacturing, JOLTS, minutes from the FOMC’s December 12-13 meeting, ADP employment, and payrolls. Before the early close and if anyone is locking loans today, we begin the day with Agency MBS prices slightly worse than Thursday’s close and the 10-year yielding 3.88 after closing yesterday at 3.85 percent. See you in 2024!