The latest round of vendor consolidation in the LOS sector saw three mortgage technology heavy hitters acquire competing or complementary software developers in a series of moves that shook up the landscape of origination technology.
The first pair of banner deals in 2011 happened within days of each other—Lender Processing Services' $9.8 million acquisition of PCLender on March 14 and CoreLogic's $31.6 million acquisition of Dorado Network Systems on March 15—and was followed up by Ellie Mae's $25.2 million acquisition of Del Mar DataTrac on Aug. 15.
Each deal has its nuances, but customer acquisition was the primary motive behind all these transactions. More important than the opportunity to sell LOS technology to these new users, the acquiring vendors are focused on delivering various ancillary origination services and technology that complement the LOS and provide a growing source of revenue for these companies.
For example, Pleasanton, Calif.-based Ellie Mae generated $45.4 million in revenue from sales and transaction fees from its flagship LOS Encompass in 2011, according to recent financial disclosures. But revenue from fees charged for accessing the Ellie Mae Network, which connects lenders to various third-party origination services, accounted for 18% of Ellie's total annual revenue of $55.5 million.
“We see the acquisition of DataTrac in that they had a very solid and loyal customer base to their back-end offering,” said Ellie Mae chief operating officer Jonathan Corr. “For us, that was an attractive way to expand our market share and ultimately over the long haul, bring folks to a common platform.”
Santa Ana, Calif.-based CoreLogic, whose core business is in data and analytics products and services, took an opposite route from Ellie Mae, but wants to arrive at the same destination. While CoreLogic held a 40% stake in San Mateo, Calif.-based Dorado and still holds about a 15% share of Ellie Mae's stock, it didn't have an LOS in its massive technology portfolio. With Dorado, it now has a platform to promote its other products.
“Having a cohesive technology strategy and platform brings a cohesive view for the customer into those CoreLogic data assets,” said Dain Ehring, a Dorado co-founder and its CEO, before becoming a CoreLogic senior vice president last year.
It's a similar strategy at Jacksonville, Fla.-based LPS, explained COO Dan Scheuble. LPS enjoys a 30% market penetration among the top 50 originators with its highly customizable Empower LOS, but Scheuble said Empower isn't suitable for the “thousands of other players out there originating mortgages,” outside the top 100. By acquiring Hockessin, Del.-based PCLender, LPS now has a software as a service offering for that market segment.
“It's a race to acquire those customers onto your technology, because you have a significant advantage of winning other products and services if they're on your core underlying technology,” he said.
Ellie Mae added 200 lenders from DataTrac to its customer base, while LPS picked up 100 additional LOS customers with PCLender. Last year, LPS added 24 customers across its entire spectrum of origination technology, which includes the two LOS offerings and RealEC, an automated vendor management platform. Scheuble said he's never seen so many lenders looking for origination technology, and the number of companies in the new customer pipeline is “unprecedented.”
The backing of a large parent company is especially critical for Dorado, which targets its LOS to large banks that are just as concerned with a vendor's ability to stay in business as they are with the features of the software.
“This is mission critical for lenders, you live or die by it, so having that large balance sheet in the back-end with a successful company also gives them a viable option,” Ehring said.
The result is that Dorado's pipeline of new customers has tripled since the acquisition.
Despite the growing activity for LOS vendors, market conditions have made it a more difficult industry to operate. At the peak of the mortgage boom, the count of software companies offering a mortgage LOS or point of sale application numbered well over 30. Even after the market downturn, there are more than 20 vendors in business today offering some form of POS or LOS technology. The severely fragmented sector makes it difficult for any one vendor to grow market share and have the capital to advance their technology.
“I don't think the industry is being very well served with 15 or 20 vendors that all have tiny little pieces of the marketplace and they can all claim to do one or two things very well, but don't have the whole picture,” Scheuble said.
Consolidation in the LOS sector is nothing new, particularly for Ellie Mae, which got a boost in its formative years by acquiring and combining LOS vendors Contour and Genesis in 2001. Back then, Ellie Mae maintained support for the two platforms while it worked to combine the best of each system into Encompass, gradually migrating customers to the new technology. Corr said Ellie Mae has relied on that experience in the process of integrating DataTrac into its operation.
Ellie Mae has already released a new permutation of the Encompass front-end for DataTrac users to directly integrate into their back-end LOS. And Ellie Mae developed a version of DataTrac's commission tracking software for Encompass users.
Summit Mortgage Corp. is a longtime user of the DataTrac LOS and months before the Ellie Mae deal, dropped Encompass in lieu of a POS application DataTrac was offering that boasted a direct integration into the LOS, said Michael Moorhouse, national production manager of the Plymouth, Minn.-based mortgage bank.
But Summit has since converted to the new Encompass Originator POS and Moorhouse said he's excited to see how future versions of the Encompass LOS will incorporate DataTrac features.
“What could come out of this is that I think you could probably see the best of both platforms being put into the system,” he said. “This mix could end up being something positive for both companies and the customer base.”
While the companies that acquired vendors continue to execute on their strategies, it's unclear what shape future consolidation in the LOS market will take. Further consolidation will help the sector mature in the same way that automobile manufacturers consolidated into a few players, Ehring said.
“If there were 1,500 car manufacturers, you wouldn't have all the same parts, it would be really hard to maintain safety standards or expertise,” he said. “The fewer players doing it right and keeping these consumers out of trouble and doing it in a way that creates efficiency and actually make some money, I think is the key.”
