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In an evolving mortgage market, mergers and acquisitions could give mortgage company owners opportunities to achieve growth and avoid challenges.
In a three-part podcast series, Dan Hanson, the executive director of enterprise partnerships and acquisitions at loanDepot, answers three key questions for owners: When is a good time to sell my company? How do you determine its value? And what parts of my culture am I going to lose?
These discussions have been edited for length and clarity. In the first episode, Hanson explains how an owner can decide on selling a mortgage company to avoid potential market challenges in the future.
Hanson: Long-term interest rates won’t go down substantially for the next few years. Our bond market is affected primarily by government debt, which is high and likely to grow. We may be in a purchase-style market for at least another year or two.
The cost to originate loans rises, alongside appraisal fees, credit reports, FICO verification, digital verification and insurance. Lastly, the refinancing market will most likely be under 10% market share.
The pivotal question is, can I succeed and make sure my family grows and survives in an environment where costs are going up and inventory is down? If you’re making 20 or 25 basis points as an owner of a small or large independent mortgage bank (IMB), it’s not worth the risk. If you can’t make a reasonable profit for the risk, it’s time to think about joining another firm or selling your company. But you don’t want to be in a position where you have to sell.
The second episode explores how owners can maximize their company’s value in the eyes of a potential buyer.
Hanson: There’s two types of sales. A stock sale means we’re going to buy the company’s stock, establish loan liability for already-produced loans and buy the shell. An asset sale is where the organization’s shell, licenses and their value are spun off and sold separately because it’s not needed by the acquiring company. The asset sale also doesn’t carry any liability for past loans, which stays with the original founders.
An acquirer mainly judges how much business a particular firm will bring over the next three years. The other thing is the mix of your business and the geography. At loanDepot, we’re determining whether our business will complement, increase productivity and add value to the organization we’re acquiring. It’s also important that both parties agree they have a really good chance for success.
The series closes with the third episode, which examines potential culture changes within organizations during an acquisition or merger.
Hanson: The reality is there will be change. There will be new technology, benefits and more standardization of policies and processes. In general, people hate change and they feel like their voices will be silenced. But the trade-offs are pretty dramatic for an owner. No. 1, you eliminate all the risk as an owner.
I would also say that employees must embrace a different brand. Hopefully, the benefits of additional products, pricing execution, technology and marketing will help the productivity of loan officers. Also, owner engagement when certain policies or procedures cause angst is really critical feedback. And having the acquirer appreciate the successes of the company they acquire and adopt those practices makes them better.
