With persistent low rates, 2021 will be
Strong and stable earnings provide a window of opportunity to raise capital and monetize equity. Most mortgage businesses wouldn’t
Optimize equity structure
Mortgage banks are privately held without outside investors, so they often lack robust planning skills and internal controls that are necessary to support a successful capital raise. In order to attract outside equity, it makes sense to engage an advisor — not just an investment banker — to identify areas to improve and assist with that process. This will prepare the company for extensive diligence on its people and processes.
For midsized firms, private equity is often better than public. A dual-track strategy for both private and public equity is a prudent option. When deciding on the best approach, ownership should carefully consider the trade-offs between enhanced scrutiny of post-IPO financial reporting versus expectations of a subsequent liquidity event by private investors. Finally, we encourage clients making these decisions to consider M&A possibilities: acquirers often bring the appetite and resources necessary to grow the business.
Becoming a bank is another expansion strategy. There are hundreds of banks that are acquisition or merger candidates. Since bank earnings tend to be more annuity-like, with strong controls and oversight by regulators, they have more funding alternatives and command higher multiples. As a bank, mortgage businesses have access to deposits and wholesale funding and a broad range of public or private equity financing to support growth.
Whatever the path, strategic and cultural fits between the company and investor are critical. A company’s strengths and weaknesses — and strategy — often reflect its company culture. This being the case, it is critical for companies to evaluate the perspectives of potential investors and choose investors that understand and support their vision and the culture behind it.
Scale funding
Warehouse funding capacity often does not keep pace with production. This results in insufficient unused availability to close loans on time. In some cases, high volumes enable warehouse providers to tighten their credit box without losing business — leaving the mortgage banks without funding for loans outside that box. One solution is to diversify sources of funding by bringing on a few new warehouse lenders.
Turning loans faster is another way to make the most of limited warehouse availability. Particularly for loans going into Ginnie MBS, mortgage banks can agree with their trade counterparty to settle before the TBA settlement date. Mortgage banks can also establish gestation repo lines, which function like warehouse lines where the collateral is TBA securities rather than the underlying loans. MSR facilities and servicing advance facilities may also be part of the funding mix.
Another way to increase the pace is to speed up post-closing. Streamlining operations can often shave a few days off, enabling secondary to pool and deliver earlier. As loans come off the line, availability increases.
In mortgage banking, the total cost of financing includes the funding fee and wire charges in addition to the interest rate (in current market, the floor rate). Borrowers must also consider incentive pricing. Therefore, lenders should carefully evaluate all-in pricing to determine their optimal funding strategy.
Simple servicing upgrades
Especially during a refi wave, maintaining accounts as “Customers for Life” is the Holy Grail. Unfortunately, servicing operations are usually designed to minimize cost, rather than maximize customer engagement. This can be a costly mistake.
Servicers should go beyond offering a refi quote when a customer submits a payoff request (too little, too late). To add value to customer interactions — and create true engagement — banks can offer relevant financial advice using multiple sources of data, even when questions aren’t explicitly asked. It is critical to link consumer direct marketing with data from servicing operations.
Surprisingly, today capturing refis isn’t the most important issue in servicing — it’s managing forbearance plans and delinquencies. As a result of the COVID-19 pandemic, missed payments, and eligibility to miss payments under a forbearance plan, have reached epic levels. Any misstep can shift exposure for credit losses from the agencies to the seller/servicer.
Even with existing technology, servicers can easily eliminate a decision layer and streamline processes to lower repurchase exposure (and the expected loss on such repurchases). Some technology for banks to consider include auto-dialers, call routing software, automated decision trees, chat-bots and electronic access to loan files, payment history and call logs.
Servicers can improve loss mitigation efforts by utilizing imaging tools which extract data from borrower correspondence. They can also manage vendor selection and negotiations to maximize leverage with vendors. Exiting forbearance may trigger defaults and necessitate high-touch servicing. Banks should plan now to meet the surge that will be needed to process these exits.
