On the heels of several high-profile reverse mortgage acquisitions as well as the loss of the most popular reverse mortgage product, lenders may be looking to consolidate even more in order to capitalize on existing opportunities in a down market for loan volume.
Consolidation is already playing out through recent transactions involving some of the nation’s mortgage giants and their appetites for reverse mortgage servicing rights and originations. Both Walter Investment Management Corp. and Ocwen Financial have made landmark deals lately, with Walter’s acquisitions of RMS for $122 million and Security One for up to $31 million and Ocwen buying Liberty from Genworth for $22 million. Then, most recently, Walter picked up more than $12 billion in servicing rights from Wells Fargo—comprising 79,000 reverse mortgage loans.
They are also growing their platforms that will position them to originate loans and securitize them under Ginnie Mae’s HMBS program. “There’s a natural tendency to consolidate, as the market was very fragmented at its peak, with more than 2,000 originators,” says Michael McCully, partner with New View Advisors. “Now, with volume shrinking, consolidation becomes critical, as it’s needed to maintain profitability.”
The trend is also taking shape for originators, which are gaining more critical mass than in the past.
“There’s a healthier ‘middle class’ in the industry these days,” says John Lunde, president of Reverse Market Insight. “There used to be a huge number of onesie-twosie [originators] and a few doing volume in the 10-20 loans per month range. Now it’s mostly companies doing at least 10 loans per month.”
Brokers: Down for the count?
While the general sentiment seems to indicate that brokers are “trudging along” as one put it, in response to the suspension of the fixed rate standard product, there is a greater likelihood today that brokers today won’t be able to maintain their businesses with less profit and more operating costs.
Most independent lenders have indicated regulatory uncertainty is the greatest factor and with a smaller premium on the loans currently being originated, this has potential to play out for the smallest of businesses.
“There’s likely to be a group of brokers who either decide it’s not worth it, or can’t make the economics work with the premiums associated with the standard fixed going away. It’s a simple story of reduced revenue per loan. I think there will be an impact there,” Lunde says.
Where brokers of the past may have enjoyed working for themselves, there’s more impetus today to join another firm.
This type of consolidation, over time, could play as a success story for all involved, Lunde says.
“For some of the middle tier companies, if you’re doing 20 loans a month, it doesn’t make sense to make sure you have all the HMBS approval requirements, but if you can pull in a couple more to get to 40 or 50 loans per month, it starts looking a lot more attractive. For folks who want to get bigger or those whose economics just got slimmed down, there’s more reason to join up. In some ways it could be a little bit of a happy marriage in that sense.”
Another way companies are shifting is by absorbing operations and personnel that have not been a part of their traditional models or original business plans.
“As far as business models go, many of the retail shops with boots on the ground originators are saying ‘We have to have a call center.’ The call centers are saying, ‘We have to have boots on the ground,” says Jeff Taylor, president of Wendover Consulting.
A new kind of hybrid lender is emerging as the companies committed to the business diversify their operations. Of the top-10 lenders by year-to-date volume as of March 2013, at least six have both phone originators and field originators, even if only a handful of the latter.
“In the middle tier, there are now a lot of folks with a hybrid approach,” Lunde says pointing to Maverick Funding, which recently ranked No. 14 in terms of loans year-to-date and Associated Mortgage Bankers which now sits at No. 10. “It seems to be a pretty normal combination these days.”
The list goes on to include Liberty and Reverse Mortgage USA among a handful of others who are testing the waters with a hybrid approach.
“If any company is going to be a dominant top tier lender and originating loans, they probably need to have a multiple model approach,” Lunde says.
Capital is King
The rise of the non-depository backed lender on a growth path is ultimately a reflection of the times—but it may not be such a bad thing.
“Capital is king, particularly in this business,” Taylor says. “At the end of the day, all of these loans, whether originated on the kitchen table or in an office—they all end up with one of the aggregators. RMS, Urban, Sun West, Generation, are all putting them into Ginnie Mae Securities.”
And while volume has declined substantially since the market’s peak in 2009, directly in proportion to the housing downturn, the entry of new players—and their continued growth, is providing cash and efficiency to a business that has had its share of naysayers.
“Three years later we have people getting into the business and writing checks,” Taylor says. “Better capitalized entities are going to be looking for acquisitions or expanding their ability to issue Ginnie Mae securities.”
But those who succeed will have to keep up with a dynamic marketplace that has shifted completely on the basis of marketing, product type, and ultimately the consumer need—or want—for the option to tap home equity.
“When all the dust settles, it’s about who has the customer or who can find the customer,” Taylor says. “More so than in the past 25 years, the product is changing, the consumer changing and the consumer needs are going to be refined.”
This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.
Written by Elizabeth Ecker