MPA spoke to the man who took Mortgage.com public during the dotcom boom
With the U.S. mortgage market projected to generate $4 trillion in origination volume in 2020, it’s little surprise that the industry has seen its share of activity behind-the-scenes. Investors are eager for a taste of the spoils, hence the recent IPOs of Rocket Companies and Guild Holdings Company, while companies like United Wholesale Mortgage, which announced a $16.1 billion merger with Gores Holdings IV in September, and Intercontinental Exchange, which acquired Ellie Mae for $11 billion in the same month, have gone the acquisition route as a means of compensating for the drop in origination volumes expected in 2021.
“In years past, we saw strong companies buying weaker counterparts, but this year, we’re seeing strong buying strong,” writes Garth Graham, senior partner at STRATMOR Group, in a new report, Timing Is Everything: Four Must Know Realities about the Mortgage M&A Market.
Graham had a front-row seat for the tech-driven IPO madness of the late 1990s, when he took Mortgage.com public as the first industry-related dotcom IPO. Back then, speculation was as much a factor as profitability. Today, however, transactions are taking place at a time of unprecedented success. It’s a seller’s market in which buyers are willing to pay a premium for a profitable asset.
That’s why Graham says now, as opposed to dreary years like 2018 when merger and acquisition activity was actually far heavier, is a “great time” for the owners of mortgage companies to consider selling. With Mortgage Bankers Association projecting a $700 billion decline in originations for 2021, selling before interest rates rise, refis dry up, and margins tighten will allow businesses to sell from a position of strength rather than one of weakness.
“The buyer is not going to pay a large premium for an institute that’s not making money,” he says. “It’s much better, if you have any reason to think you may want to sell at some point in the future, to explore your options when the market is good than to wait until the market’s bad.”
Doing it right
Not all companies can expect to draw the same level of interest as Rocket’s IPO, but they can certainly learn something from it. As Graham tells MPA, it was Quicken Loans, the jewel in the Rocket crown, that drove demand for the company’s shares. Quicken, like Guild, has shown itself to have an attractive combination of offerings – proprietary tech, an efficient platform, celebrated customer service – that allows the company to adapt to shifts in the market while still delivering results for its clients.
“They’ve done a lot of things right, which sets them up for the future,” he says.
Graham advises owners hoping to make themselves more attractive to buyers to prepare for the return to prominence of purchase loans and concentrate on their ability to deliver high quality service when originating. The refinance boom has been a blast, but Graham warns that companies pivoting to a more refi-centric model risk being unable to compete when demand inevitably shifts.
“In a normalized market, it’s still the same. You have to close purchase loans on time to be successful,” he says.
Prospective sellers are also urged to exercise extreme discretion when involved in a potential sale. A company’s employees should not get wind of a deal until it is absolutely necessary.
“You need to do it carefully. You need to do it anonymously. And you need to control the disclosure process,” Graham says. “Be careful. And be thoughtful.”
Owners can also make their mortgage outfits more attractive to buyers by painting an accurate, persuasive picture of their business. Graham says this comes down to having a “good command of the numbers”, including data that demonstrates both continual growth and a favorable comparison to competitors, as well as a pro forma regarding future profits that runs three to five years.
“The one thing to remember is, if you’re making money as an independent mortgage banker, it’s highly likely that a good buyer would make even more money after [the purchase],” Graham says. “And that’s why you’ll get a premium for your business.”