Knight: Reverse Mortgage Acquisition Provides Attractive Growth Opportunity

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A couple weeks after announcing the acquisition of Urban Financial Group, Tom Joyce, CEO and Chairman of Knight Capital Group, Inc. (NASDAQ:NITE) said the purchase provides Knight an attractive growth opportunity during a conference call with analysts after the company’s first-quarter net profit jumped to $27.8 million from $9.4 million, a year earlier.

Expected to close this summer, the deal made sense for Knight due to a number of factors.

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“First, the revenue potential from an integrated origination securitization trading model, an HMBS or home equity conversion mortgage MBS, are increasingly popular with institutional investors,” said Joyce. In addition, the relatively low risk associated with Ginnie Mae HMBS and the fact it’s expected to be cash flow positive immediately following the close are all reasons it made sense.

The timing of the deal was also right says Knight.

“Obviously mortgage became a four-letter word in the industry over the past few years so a lot of people left the industry, which of course opens opportunity for folks who are entering the area. We think especially with the origination of the reverse mortgage product, the demographic trends look attractive and we are very confident in the team we have assembled,” said Joyce.

In terms of its long term strategy, Knight acknowledged the acquisition provides opportunities to expand into other areas of mortgage lending but its not planning to rush into anything.

“We still have a healthy respect for risk around here so we want to make sure if we pursue any of these things we do it in the right fashion,” said Joyce. At the moment he said it will have its hands full closing the transaction, followed by integrating and building the business before it starts to worry about expanding into other areas.

In response to a question from an analyst on the call regarding the impact it would have on its balance sheet, the company said it doesn’t expect to have a large inventory of loans on its books. “We will be originating, creating loans, and then very quickly selling those loans to issuers,” said Steve Bisgay, Senior Managing Director & CFO of Knight Capital Group, Inc.

With Knight’s backing it’s likely Urban will eventually be able to issue their own HMBS, but until Ginnie Mae starts approving new issuers it will have to rely on other lenders.

Last week Ginnie Mae announced it was suspending new issuers as it performed a comprehensive review of the risks associated with the HMBS program in order to evaluate possible changes.

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