Growing number of nonbank mortgage firms going public was inevitable

While Rocket Cos. was the first of an increasing number of nonbank mortgage companies to go public in recent weeks, the trend is a result of an evolution of the business that began following the Great Recession.

The latest two to go public are AmeriHome Mortgage and Caliber Home Loans, both of which have filed registration statements with the Securities and Exchange Commission.

"I think a better way of putting it is, it's been a long time in coming," said Henry Coffey, an analyst with Wedbush Securities. "Look at what's going on [in the mortgage business], two major things happened. They've made all these investments in technology, compliance and efficiencies, and in Rocket's case, marketing, to build really viable, efficient, compliant businesses."

These companies have also stood the test of time as the market share has shifted between the banks and nonbanks, he pointed out. A decade ago, the top six originators were banks. Now Rocket is the largest originator, and other nonbanks occupy three of the next six slots, he pointed out.

The Rocket IPO opened a lot of eyes in the institutional investor community to the mortgage business, Coffey said. But "a confluence of events," are also making these companies attractive as they seek to raise capital via going public, such as "the next biggest generation of potential homebuyers flooding into the market," creating a "second wave" of purchase originations going forward after this year's projected $3 trillion refinance-driven volume.

Besides Rocket, United Wholesale Mortgage will be going public through a merger with a special purpose acquisition company.

There are also reports that loanDepot is looking to go public after a failed attempt in 2015. However, as of Oct. 2, no new filings for loanDepot are on the SEC website. The last submission was the 2016 withdrawal of its registration statement.

Caliber in its current structure was formed in 2013 by Lone Star Funds when it merged two companies it controlled, Caliber Funding and Vericrest Financial.

Lone Star Funds then purchased Cobalt Mortgage in 2014, First Priority in 2016 and Banc Home Loansin 2017.

The percentage of Caliber that Lone Star plans to sell will not be announced before the deal is priced.

Following the IPO, Caliber intends to list its common stock on the New York Stock Exchange under the ticker symbol HOMS. Credit Suisse, Goldman Sachs and Barclays are acting as book-running managers for the offering.

Lone Star will be receiving all of the proceeds from the IPO; there will also be a concurrent offering of "mandatory convertible preferred stock," where the proceeds are planned for Caliber to use to purchase common stock from Lone Star.

For the first six months of the year, Caliber earned $279.3 million, compared with a net loss of $59.4 million one year prior. Revenue for the first half of this year was $1.13 billion compared with $427.5 billion for the same period in 2019.

While the mark-to-market for mortgage servicing rights was higher this year, $320 million compared with $295 million one year ago, Caliber's gain on sale was much higher, at $1.1 billion versus $41l million.

Caliber originates conforming, government and nonagency loans. During 2019 it sold $1.5 billion of these loans to Lone Star. It currently does not sell nonagency loans to Lone Star, the registration statement said.

Total volume in the first six months of the year was $36 billion. For all of last year it did $61 billion, with just $18.3 billion in the first six months of 2019.

Caliber executives were unable to speak about IPO, citing quiet period rules.

AmeriHome did $44 billion in production for 2019. For the first half of this year, it produced $26.9 billion, compared with 418.6 billion for the same period last year. Net income for the first six months was $275 million, up from $102.7 million one year prior.

Its gain on sale was $339 million for the first half of this year, compared with only $84 million one year prior.

Also like Caliber, AmeriHome in its current form dates to 2013; for a two-year period prior to that it had been majority owned by Impac Mortgage Holdings, primarily for its secondary market approvals. Once Impac obtained those separately, the stake in AmeriHome was no longer needed and it was sold.

As of June 30, AmeriHome serviced nearly $80 billion while Caliber had a $134.4 billion portfolio.

AmeriHome officials also cited the quiet period for being unable to speak about going public.

Companies go public, not just to make a lot of money for their current owners, Coffey said, but "to find an avenue for putting real capital into the business."

And some of the worries over forbearances and defaults for mortgage servicers can be addressed by these companies having more capital, he said.

The nonbanks have reset the standard for who has market leadership in the mortgage business. "Maybe people should wake up to the amount of technology, the durability and the returns being generated, both in good cycles and in bad, and put a better valuation on these companies," Coffey said.