California-based Countrywide Home Loans has acquired Hopkinton-based Marathon Mortgage. Pictured above is a Countrywide office in Texas.
The sales of two Bay State mortgage companies last month may be just the first of many. With loan volume slowing, many industry watchers say a thinning of the ranks in the mortgage profession and industry consolidation are likely to accelerate in the coming year.
In what may herald the onset of a rapidly shifting competitive landscape, New York-based American Home Mortgage Corp. recently purchased Needham-based Homevest Mortgage, and Countrywide Home Loans of California acquired Hopkinton-based Marathon Mortgage. The terms of the deals were not disclosed, but industry experts predict even more mergers are likely in the months ahead.
Dean Caso, co-founder of Homevest, said he initially did not have an interest in selling his 60-employee company even though the opportunity to do so has been available for some time. Several larger mortgage companies had approached him about selling his business over the past three years, he said. But it was not until American Home Mortgage Corp. expressed an interest in his firm that things changed. Caso said he knew the business he helped create would fit in well within the larger company, and that more services would become available to his customers. Homevest and American Home Mortgage share many of the same business philosophies and approaches, Caso said, but American Home, a national lender, has a deeper support structure and broader reach. The merger was finalized on Jan. 31.
“These guys were really well beyond what we could do at Homevest. I was really blown away by some of their resources. They can just bring more to the table than we could offer,” said Caso. “I looked at it and said, ‘If I was a loan officer, this is the place I would want to work.'”
Soon the sign on the front of Caso’s building will come down, and his place of work will be inside an American Home Mortgage office as vice president and branch manager. He said he has a long-term contract with his new employer and that most of his staff is also staying on board.
Caso said he believes there will be more small or mid-sized lenders partnering with larger companies as the industry tries to cope with a slowdown that already is well under way. Rising interest rates are slowing refinance activity, while a softening real estate market is putting the pinch on home purchase mortgage originations.
“The industry as a whole went through a very difficult time in November, December and January. It’s just a lot of people chasing too little [business]. As volume has started to slow down, larger lenders are looking [for acquisition and partnership opportunities],” he said. “If the market stays like it is right now, I think you will see a lot more of these transactions.”
For smaller lenders, slow business periods hit harder. For large lenders more able to withstand cyclical downtimes, those pressures create opportunities to expand through acquisition.
Caso also said if he had joined American home mortgage sooner his office would have had a more lucrative year. Homevest processed $500 million in loans in 2005. He said he thinks his business would have gone up 25 percent for the year had the companies already merged.
“In 2005, I think we would have done another $100 million,” said Caso.
The mortgage industry once consisted of entrepreneurs willing to take a chance on a fresh industry that was changing the lending landscape, said James Dougherty, executive director for the Massachusetts Mortgage Association. Many of the first mortgage companies emerged during the Carter administration when rates climbed to record highs. The concept of non-traditional loans caught on, and mortgage brokers found their niche. But the industry is different today and so are the players, Dougherty said.
Large corporations are now competing for the same business as smaller companies. They are also gobbling up many of their smaller competitors. Some companies look to grow by opening new offices, while others look to do the same through accusation, said Dougherty. Throw the rising costs of technology and a growing number of products and services into the mix, and the competitive landscape is not as balanced as it used to be. It also means smaller companies are more likely to entertain acquisition offers, he said.
‘Soft’ Sell
James F. Flynn started Marathon Mortgage in Hopkinton in 1996 with the intention of someday selling once he was ready to retire. He said he thought he would start considering those kinds options five years from now and is still a little surprised that he accelerated those plans and sold Marathon, which has 12 employees, to Countrywide Home Loans on Jan. 3.
“They [Countrywide] were looking to grow their market share in the Metrowest area. They liked our business model,” said Flynn. “I had to sit back and think about the economic conditions changing. Of course, that was a factor.”
Flynn said he is probably not alone in deciding now is the right time to sell. Several local lenders he knows are actually hoping a larger company will initiate merger discussions, Flynn said. In the short time he has been part of Countrywide, Flynn said he already has been asked by two lenders whether Countrywide might have an interest in buying their mortgage companies too.
For Countrywide, buying more Bay State mortgage firms is part of an active plan to expand and increase market share.
According to Brian Koss, New England senior vice president for Countrywide, the national lender currently holds 7 percent of the mortgage market share in Massachusetts. He would like to see that grow to 13 percent this year, he said.
“To do that we need great leadership,” he said, adding that a way to build great leadership is to find smaller companies that are well established in targeted growth areas and acquire them.
Koss said it is a good time to be shopping for potential acquisitions since the mortgage market has become tougher, especially for the small and mid-sized mortgage companies.
“It was real easy to make money before. I think they are realizing it’s hard to compete with larger companies,” said Koss. “It’s reserves. A lot of smaller companies don’t have the deep pockets” to ride out very slow business periods, he said.
Larger mortgage companies are more willing and able to coast through turbulence in the marketplace while other companies may have to struggle to survive.
“If you milk a business until it’s dead, what you have is a dead business,” said Dougherty of why smaller firms might agree to merger deals.
Dougherty said several of the first mortgage companies were started by people in their 30s and 40s, and that first generation of mortgage brokers now is close to retirement age. Some of them might be looking to sell their companies if they do not have a family member lined up to take over.
But Koss said Countrywide will not be buying firms indiscriminately simply because opportunities are available. He said some company owners want more than their firms are worth and others want to sell the business and get out, something that doesn’t fit with Countrywide’s strategy of expanding its base of local leaders. The company name often counts for less than the local connections and expertise its staff have developed.
“We want them to stay,” Koss said. So when buying a mortgage company, keeping the leaders and staff is an important aspect that comes up at the negotiating table.
“We won’t add for the sake of adding. They have to be a good fit,” Koss said.
While Countrywide is actively looking for more companies in the Bay State, Koss said the trend is industry-wide and other larger mortgage firms will be active in seeking to grow through acquisitions in the coming year.
“I think it’s true that companies are willing to listen to acquisition presentations when the market is soft,” said Dougherty. “The consolidation trend is going to continue. I just suspect you will see more of these. This is really just a parallel universe to the [slowing] real estate industry.”
