Will Knight Deal Spur Other Reverse Mortgage Acquisitions?

Running into people from Goldman Sachs and other Wall Street banks used to be a common occurrence at reverse mortgage trade shows around the country, but when the markets came crashing down everyone disappeared.

Those same people have started to slowly come back and Knight Capital’s decision to purchase Tulsa, OK based Urban Financial was a welcome surprise to many in the industry.  “Clearly, I think the transaction may spur other transactions aimed at securing distribution channels for HMBS demand,” said Torrey Larsen, CEO of Security One Lending in San Diego, CA.

Lead by David Fontanilla, head HMBS trader at Knight, the acquisition provides the company direct access to HEMC production which it can use to issue HMBS for clients.  When RMD asked if other Wall Street banks might follow their lead at a conference earlier this year, Fontanilla said he “has heard of others looking.”  While he wouldn’t reveal exactly who, he did stress that companies “need to have a lot of experience in the space” in order to be successful.

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One name that has quietly been floating around as a potential investor is Cantor Fitzgerald, a large global financial services firm that was reportedly in talks to purchase or invest in a major reverse mortgage lender on the West Coast.  According to our sources the deal hasn’t progressed but Cantor recently opened up a desk to start exclusively trading HMBS and other non-agency reverse mortgage securities.

Interest in reverse mortgage lenders isn’t only coming from Wall Street investment firms.  RMD has learned of one mid size bank on the east coast who is looking to make an investment in the next couple months.  Despite volume being down during 2010, the potential customer base for the industry presents a huge opportunity for banks.

“The bottom-line is companies want to get into this space now as the margins are high and the number of seniors over 62 will continue to grow over the next 20 years,” said an investment banker who has clients looking to invest in the space.

Institutions see an opportunity to roll up smaller mortgage banks that have trouble meeting new Federal Housing Administration net worth requirements or plan to attract talent from larger reverse mortgage lenders and hire teams to grow organically.  When asked if the Knight/Urban deal will help spur other deals, he said, “I very much doubt another Urban like deal will get done anytime soon as the premiums the bigger players want is not worth their price.”

Another investment banker we spoke with earlier this week who asked not to be named said they’re anxiously waiting to see what happens with the potential principal limit reductions.  If Congress provides the money requested, “I’d expect to see investment and acquisition interest pick up,” he said.

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