Is Black Knight selling Empower to close the ICE deal?

Black Knight is reportedly placing the Empower loan origination system up for sale in order to gain antitrust approval for its acquisition by Intercontinental Exchange.

From the day the deal was signed, most expected that Black Knight would have to divest the LOS, the No. 2 most used system behind acquirer ICE Mortgage Technology's Encompass. Reuters reported that Black Knight has hired Truist to handle the sale.

Intercontinental Exchange, on the other hand, at that time said since the two platforms have different customer segments, it was not anticipating having to sell Empower.

"However, it is unclear if the Empower sale process relates to a consent decree with the Federal Trade Commission, or is a proactive move by Black Knight and ICE to bolster their defense in a possible trial," said Ryan Tomasello, an analyst for Keefe Bruyette & Woods.

He pointed to the merger between UnitedHealth and Change Healthcare as an example of the latter. The Department of Justice sued to stop the transaction but a federal judge dismissed the case while ordering Change Healthcare to proceed with its planned sale of the ClaimsXten unit to allow the deal to proceed.

But pushing Empower out of the deal's scope is not enough movement by the companies for federal regulators to approve the transaction, because of the power the combination would hold across the industry spectrum, the Community Home Lenders of America, a deal opponent, commented. This is because the transaction would bring ICE's Encompass, the most-used LOS, under the same roof with the dominant player in servicing technology, Black Knight's MSP.

"A sale of Empower would be welcome and constructive, but it would not alleviate CHLA's concerns, as the integration of origination and servicing services would still create market power that could result in lenders having to accept practices and pricing that don't take place in a fully competitive market," Scott Olson, executive director of the CHLA said in a statement.

It would also bring other market leading mortgage technology under the same roof, including Simplifile and MERS on the ICE side — which it owned prior to buying Ellie Mae in August 2020 — and Optimal Blue, owned by Black Knight.

And among all of those various pieces of technology, Empower has the lowest market share, said David Stevens, the CEO of Mountain Lake Consultant and the former CEO of the Mortgage Bankers Association. Selling it might not be enough to move the needle towards gaining support for the deal.

However, a broader divestiture, possibly of MSP, or an outright rejection would not exactly deter ICE in his opinion.

"ICE has been very patient and is deliberately trying to expand their footprint in the mortgage market," Stevens said, pointing to the MERS acquisition. At that time, Stevens was on MERS' board and noted that from start to finish the purchase took three years, largely because MERS was under an Office of Comptroller of the Currency consent order.

Further divestments would delay the merger and some parties, including ICE investors, might not be as tolerant of the timeline.

ICE might go after other targets if the deal gets the kibosh, possibly another servicing platform such as Sagent, which Stevens noted has been growing its market share.

Black Knight already agreed to sell TitlePoint to its former corporate parent Fidelity National Financial because of this deal.

A paper issued by Federal Financial Analytics on Feb. 6 called on regulators to reject the transaction because ICE, which also owns the New York Stock Exchange among other entities, already poses broad systemic risks to the economy.

That is on top of the "unrivaled power" ICE would have in the U.S. mortgage and housing markets.

But if it was approved "and even if this is accompanied by certain constraints, then the Financial Stability Oversight Council should quickly designate ICE as a whole as a systemically important financial institution and bring the full scope of its activities across the global financial market and U.S. residential mortgage finance under safety-and-soundness, resolvability, and consumer protection regulation," the paper said.

It mentions the possibility of post-merger divestitures, but said that "would be a complex regulatory undertaking that might permit considerable arbitrage and evasion."

Stevens added that while he has a lot of respect for ICE, he is not a fan of companies that are able to control the market.

"Unless there's some overwhelming reason to move forward, which I don't see, I think the creation of a monopoly in this sector likely only proves itself to be a long term challenge for the overall mortgage industry and for consumers," he said. 

The report of Truist's involvement has given a slight boost to Black Knight's stock price, but it is still down from the day the Black Knight-ICE deal was announced, May 4, 2022, when it closed at $72.84.

Black Knight closed at $62 per share on Thursday. It opened the next morning at $62.45 and by 11:30 a.m., it was up to $64.89.

Meanwhile at the same time on Friday, ICE's stock price was up 75 cents per share to $108.29.

Requests for comment were not returned by Truist. Black Knight, ICE and the FTC declined to comment.