LenderNews by Rob Chrisman
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Mar. 2: CFO job, ex-CFPB founder offers training; another Caliber deal; in M&A what makes a good lender makes a good seller

March 2, 2017

Here’s a public service announcement for folks in Detroit: check to see if you should boil your water before you drink it. Apparently drinking water problems are not confined to other areas of Michigan.
 
Northpointe Bank is looking for a qualified individual to join its senior leadership team as the CFO. The bank, recognized as one of the top performing banks in the country, has a strong focus on mortgage lending, and is a Fannie Mae, Freddie Mac and Ginnie Mae approved lender. The candidate must have extensive experience with the accounting aspect of both banking and mortgage lending along with a proven ability to plan, develop, organize, implement, direct and evaluate the organization’s fiscal function is imperative. If interested, please forward a resume to Sheri DuChemin, VP Human Resources (616-974-8490).
 
According to the most recent ARMCO Mortgage QC Trends Report, in Q3 2016, as in the previous two quarters, Legal/Regulatory/Compliance defects were the major driver of the overall defect rate as lenders continued to make adjustments in the implementation of TRID requirements. Some highlights include: The benchmark Critical Defect Rate drops to 1.27%, supporting a downward trend after reaching a high of 1.92% in Q1 of 2016; Overall defects associated with the Legal/Regulatory/Compliance category jump by over 14%, however, critical defects within the same category drop to a 12-month low, comprising 22.69% of all critical defects due to changes in lender severity ratings are the cause of this decrease; Critical defects associated with Income/Employment lead all categories for “Credit Related Defects”. The top reported critical defects are all associated with the miscalculation of income. Access the full report here.
 
For brokers, “Great news to get your business kick started in March. Carrington Mortgage Services, Wholesale Lending has made the process easier and the experience better for its brokers with the following changes: First, management is removing automatic appraisal review for conventional loans, and eliminating automatic VOD requirements for purchase and refi loans. All 4506T requirements are being revised based on AUS. Finally, pre-closing VVOE on Streamline & VA IRRRL loans were removed. These are just a few of the changes made recently in Carrington’s ongoing effort to become easier to use and with a commitment to their ‘under-served’ strategy!”  Brokers new to Carrington should contact Matt Evans, VP Sales West, (949-517-6033) or Sam Bjelac, VP Sales East, (410-603-8053).
 
Jim McCarthy, a founding member of the CFPB and expert on the complaint process, announced that he will be helping companies navigate the complex world of corporate complaints. Jim will be leaving PennyMac to hold a series of seminars through InsideArm.com in March and April designed to help businesses navigate the pending CFPB complaint intake, and Company Portal changes. He also wants you to contact him if you need any help with the CFPB complaint process or technology. To register for the seminars, click here.
 
In merger & acquisition news….
 
It isn’t the first, and won’t be the last. Caliber Home Loans Inc. will be buying the residential mortgage assets of Banc of California. After the deal goes through it will reduce operating locations by more than 60 percent and total employees by about half, leaving it with fewer than 950. The deal includes the leases related to Banc of California’s mortgage-origination offices. Bloomberg reported that, “Annual run-rate expenses will drop by more than $150 million, and the bank expects to book a one-time cost of about $4 million, per the filing.
Banc of California has had its share of turmoil and bad press, with its former CEO Steven Sugarman resigning in January when the company disclosed a probe by the Securities and Exchange Commission. The sale is specific to Banc Home Loans, the Bank’s retail division. Portfolio Lending falls under the commercial division, so it’s “business as usual” with originations coming from its Wholesale and Correspondent partners. The sale also includes a portion of the servicing assets.
 
On the bank side of things, it has been quiet recently. In the last week or so it was announced that Legence Bank ($304mm, IL) will acquire 8 IL branches with about $146mm in deposits from MidCountry Bank ($797mm, IL).
 
Research by Bank Director finds the primary reasons bankers cite for walking away from an M&A target are: price too high (64%), credit quality (54%), culture at the target (49%) and regulatory concerns (17%).
 
So, what is important in maximizing value in an M&A deal? STRATMOR’s Jeff Babcock weighed in with his thoughts given recent experience: there are still many more motivated, well-capitalized buyers for retail origination platforms than there are such entities available for sale.
 
“It continues to be a true ‘sellers’ market’ for mid-size Independents. The challenge for prospective sellers is not just attracting a buyer, but aligning with the right buyer to optimize the sale execution of their company. We believe that selling shareholders can (and should) proactively position their organization to strategically fit with the most motivated buyers — and thereby realize the level of economic value which reasonably satisfies their financial expectations. Highly competitive bids from multiple bidders will be realized where the seller scores high on certain quantitative and qualitative criteria.
 
“Management’s ability to achieve consistent Net Income margins and sustained profitability is one of the most compelling value elements. By consistent, we mean profitability which is not simply linked to origination market conditions with wide variances between good years and bad years. Net Income margin is defined as the channel profitability including all allocated expenses. For 2014, the MBA/STRATMOR PGR Retail margin averaged 50 basis points across all mid-size Independents which improved to 66 basis points in 2015. (Although full-year 2016 PGR data has not been fully compiled as of this date, STRATMOR anticipates mid-size Independents will once again report profit margins in the 60 to 70 basis point range.)
 
“Regarding product mix, for obvious reasons, today’s buyers are focused on (sometimes even obsessed with) a seller’s purchase business share — but not just for the last six months. A consistently above-average purchase share demonstrates management’s commitment to building and maintaining referral sources over several years. There is a sense that where this is the case, a lender’s sales force will not revert to refinance volume when there is a mini interest rate rally. A strong purchase business culture eliminates some of volatility in the inherently cyclical mortgage business.
 
“The next most impactful element of product mix is a prospective seller’s government lending share (inclusive of FHA, VA and USDA loans). It is generally assumed that government originations generate higher revenues and margins than agency conventional loans. The PGR average government share for midsize Independents has been 40 percent for 2014/2015.
 
“Another consideration is the share of jumbo originations. In contrast with government products, jumbo loans generate significantly lower revenues and are a drag on earnings. The PGR jumbo average for mid-size Independents is four percent. Obviously, therefore, a significantly above average jumbo share is generally a negative.
 
“Model match and cultural compatibility are two concepts thrown about loosely in M&A discussions, but they are both absolutely critical to the success of an acquisition. Model match refers to the fundamental style of doing business — branch network composition, originator compensation structure, product focus, mortgage banking disciplines, etc.
 
“Corporate culture is all about the effectiveness by which a lender deploys and manages its human capital. An assessment of culture typically includes corporate values, leadership style, strategic direction, management effectiveness, communications, accountability, etc. While no two organizational cultures will be exactly alike, they must be compatible. The history of mortgage banking M&A is littered with examples of failed transactions which resulted from culture clashes, many of which were probably avoidable if the parties made cultural considerations a higher priority.
 
“Compliant originator compensation plans is one topic has assumed greater significance with the advent of Dodd-Frank and is often among the first questions from a prospective buyer. Within this context, compliant means uniform commission structures based entirely on volume with as few variations as possible. Any commission arrangement that is tied to revenue levels is a doubtful plan. Incentive compensation will also be reviewed in terms of possible exposure to Fair Lending violations. Bank buyers are particularly sensitive to these issues given the strategic importance of “reputation” and ‘trust’ across virtually all Bank operations.
 
“Buyers also expressly prefer that a prospective seller has completed its transition of originators to a non-exempt status such that they are eligible for minimum wage and overtime compensation. More generally, changes to lender compensation plans — especially changes to sales compensation — should be enacted prior to an acquisition so that the seller’s staff does not perceive that such changes were implemented as part of the sale or initiated by the buyer. Where the buyer must initiate compensation changes, it introduces uncertainties that are likely to detract from value.
 
“STRATMOR is often asked about whether the quality of the sales force matters. In every mortgage company sale, the primary asset being acquired is the origination capacity, quality and loyalty of the lender’s field sales force. Sales force quality is typically measured in terms of productivity, tenure/ turnover, age and concentration. A detailed analysis of a lender’s production performance provides an analytical assessment of sales management effectiveness (recruitment, training, motivation, retention).
 
“We accomplish this assessment by segmenting a client lender’s sales force into quintiles based on performance and then compare the metrics against the industry population using our Originator Census benchmarking survey tool. Since the top 40 percent of originators typically account for about 80 percent of total production, it is insightful to focus on these performers. Often most of a client’s turnover occurred in the bottom 40 percent of loan officers. And, since Originator Census data differentiates between voluntary and involuntary terminations, we can glean a sense of how proactive a lender is in clearing out low producers.
 
“Although subjective in nature, there appears to be a correlation between management effectiveness/tenure and financial performance ranking among PGR participants. For example, management effectiveness should be assessed in terms of leadership, strategic planning, employee satisfaction, accountability and communications. Does the subject company bring a history of adapting to change, innovation, creative utilization of technology, dependable management reporting and cost controls? Mortgage banking is a people business where 80 percent of expenses are related to compensation. Management’s ability to leverage its human capital is therefore an indispensable skill.
 
“What about production momentum? Management’s track record in improving market share is the best measure of production momentum. Whenever feasible, STRATMOR encourages clients to seek out local or regional market share reports. A prospective seller that can demonstrate a consistent ability to gain market share, irrespective of the industry cycle, is more valuable than lenders whose volume tracks with the industry trends.
 
“Management’s ability to earn respect and appreciation from counterparties, regulators, borrowers and even competitors provide great comfort to a prospective buyer. Investor Report Cards are one source of objective reputation assessment, as well as systematic measurement of borrower satisfaction, e.g., STRATMOR’s MortgageSAT Borrower Satisfaction Benchmarking program.
 
Lastly Jeff addressed management roles going forward. “Since a key element of an acquisition’s economics comes from eliminating redundant overhead and support functions, the enthusiastic commitment to such actions by key seller executives, who are most responsible for holding together the seller’s production organization, is a critical deal point.” Thanks Jeff!
 
Interest rates for those interested…
 
Although the data has been solid what is moving rates now isn’t necessarily economic news from a month or two or three ago, but rather the series of speeches from the presidents of the various Federal Reserve districts. There seems to be a coordinated message, yesterday, for example, from the Fed’s Harker, Williams and Dudley, that a March rate hike is a distinct possibility. And if traders and investors think rates are going to be higher in six months, or three months, the demand for fixed-income securities tends to drop, and rates move higher – a self-fulfilling prophecy. The odds of a March 15 FOMC rate hike are now over 80%. We’ll see what Fed Chair Yellen says in her next speech Friday afternoon.
 
This morning we’ve had weekly Initial Jobless Claims (-19k to 223k, lowest since 1973!). Coming up are the ISM-New York Business Confidence Index (Feb), and the Treasury will announce the auction sizes for next week’s 3, 10, and 30-year auction. For numbers, yesterday the 10-year note worsened, closing at a yield of 2.46%, and the 5-year Note and agency MBS prices worsened about .5 in price. This morning the move toward higher rates continues with the 10-year at 2.47% and agency MBS prices worse a smidge versus last night.
 
 
(Confession – and oldie but a goodie.)
An elderly man walks into a confessional. The following conversation ensues:
Man: “I am 92 years old, had a wonderful wife of 70 years who recently passed away, many children, grandchildren and great grandchildren. Yesterday, I picked up two hitch-hiking college girls. We went to a motel where I had sex with each of them three times.”
Priest: “Are you sorry for your sins?”
Man: “What sins?”
Priest: “What kind of a Catholic are you?”
Man: “I’m Jewish.”
Priest: “Why are you telling me all this?”
Man: “I’m 92 years old…I’m telling everybody!”
 
 
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Are You Sure that Rates are Going Higher?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
Rob
 
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2017 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)