Patriot Funding, which recently acquired Centerville-based LightSpeed Mortgage, is based in Framingham.

A recent merger of mortgage companies on Cape Cod could be one of the first among many still to come. Massachusetts’ regulatory and underwriting climates are tightening as a result of troubles in the subprime loan market and rising foreclosures.

“From a broker’s perspective, what’s happening is they’re tightening up guidelines, and we see [Massachusetts Commissioner of Banks Steven L. Antonakes] coming down like he’s never come down,” said Allen B. King, an industry consultant and loan officer in Shrewsbury. King said the increasing time and costs associated with regulatory compliance likely were factors driving Framingham-based lender Patriot Funding’s April 15 acquisition of LightSpeed Mortgage, a brokerage in Centerville. Patriot has five offices, all in Massachusetts, including one in Hyannis.

“Compliance is going to get worse before it gets better,” King said. He predicted that mortgage brokerage firms – many of whom have just four or five employees – may start teaming up with larger players so they can continue to run their businesses effectively.

The state’s Division of Banks hasn’t seen a flurry in mortgage companies joining forces recently, said its chief operating officer, David Cotney, though there has been an uptick in bank mergers in the past year.

Some industry watchers have attributed such moves to the need for banks to be larger to effectively build a brand and compete in the marketplace; others say consolidation of compliance teams to save costs is the primary motivation.

John Spillane, who owns a compliance consulting firm in Braintree, said that in the wake of changes resulting from the meltdown of the subprime mortgage market, he thinks more mortgage companies – regardless of the types of loans they issue – may begin feeling the same compliance “pressure and pain” experienced by banks in recent years.

“It’s being driven from the investor side, not just the regulators,” he noted. “Regulators are looking for [operational and quality control] policies and procedures to be in place. But I think investors [now] want to make sure that the loans delivered to them are sustainable,” as well.

Patriot Funding President Jim Picciotto and Bill Sifflard – former co-owner, along with fellow Cape Cod resident Paul Capeless, of LightSpeed Mortgage, which has two offices and 15 employees – said compliance costs and the desire to grow both were factors in their decision to join forces.

“We were already surviving and successful,” said Sifflard, who co-founded LightSpeed in 2002. “Patriot [has] grown at a steady pace and now they have a business model to team up with mortgage brokers who want to take their business to the next level by becoming a lender.”

Sifflard said he’s looking forward to being able to offer government-backed affordable housing loans, such as Federal Housing Administration and Veterans Administration loans, to borrowers. LightSpeed, like many brokers, lacked the underwriting infrastructure needed to offer such loans, he said. LightSpeed’s originators felt the need to tap into such products more acutely in recent months as some popular loan products disappeared, along with the subprime lenders who offered them.

Sifflard predicted that increased regulation of the mortgage brokerage community is imminent, which invariably will result in more paperwork. That, he said, equates to increased costs in time and money. As someone who’s been doing the bookkeeping for his “mid-sized” brokerage since it opened, Sifflard said he’s looking forward to returning to the work he loves – new business development – as a vice president of Patriot Funding.

Sifflard, 49, said the personalities involved in the merger were a good fit. Sifflard, Picciotto and Capeless are close to each other in age, employ similar business styles and share a common vision for the combined company’s future, he said.

Compared with a bank merger, the joining of Patriot Funding and LightSpeed was relatively easy to complete. LightSpeed will let its mortgage broker’s license expire on May 30. Otherwise, since both companies are licensed in Massachusetts, each simply has to submit an application to DOB in which they demonstrate that they are financially sound, have no consumer complaints or have resolved them satisfactorily, and that employees have not been subject to complaints in other states or when working for other companies. Owners and officers of each company also must pass criminal and credit background checks.

Staying in Subprime
Picciotto said Patriot’s acquisition of LightSpeed is different from other recent mortgage mergers and acquisitions of which he’s aware because the participants already were very familiar with one another.

“I knew the owners, and I knew people who worked [at LightSpeed],” said Picciotto, who also lives on the Cape. “We first met last October, over a cup of chowder at [Osterville eatery] Wimpy’s” to discuss a deal.

He said owners of the two companies decided that creating a larger, more consolidated presence on Cape Cod and the South Shore would be advantageous to both.

Indeed, Patriot has doubled its south-of-Boston presence, and employee count, by adding LightSpeed’s Centerville and Stoughton offices.

LightSpeed was founded in 2002. Picciotto purchased Patriot Funding 10 years ago from its founder, RE/MAX New England owner Integra Enterprises.

Sifflard said LightSpeed entertained two or three inquiries about mergers or acquisitions from very large lenders before deciding to go with Picciotto and Patriot.

Sifflard declined to name the companies making the overtures, but in recent years, at least two Massachusetts-based lenders have been purchased by national firms. Marathon Mortgage was acquired by Countrywide Home Loans and HomeVest Mortgage was purchased by American Home Mortgage Corp.

“They [firms inquiring about the possibility of an acquisition] were looking to buy up sales forces. But we never went further than the initial chit-chat,” Sifflard said. “[We don’t want] to have to go through 40 levels of bureaucracy.”

The same companies that called him are now laying off employees, he said.

Picciotto said the slow mortgage market is another good reason for mortgage companies to merge. New-mortgage production is declining as real estate values slump and interest rates remain flat, he said, making formerly popular adjustable-rate mortgages less attractive compared to fixed-rate loans. All companies, he said, are feeling the pinch.

“We are seeing contraction in the marketplace,” he said. “I doubled this company’s size over time, but in these times it’s shrunk again.” As smaller companies in general, he added, many mortgage brokerage firms are experiencing “dramatic” changes.

Today, Picciotto said, Patriot Funding is “in acquisition mode.” He’s also obtained lending licenses in Florida and Illinois, states in which Patriot is exploring the possibility of opening branches.

His company will continue to offer subprime loans, he said, even as certain products have disappeared as guidelines tighten, because borrowers still need them.

“I would say that out of every 10 people, three to five still need a subprime loan,” Picciotto said. “First-time homebuyers and lower-income communities, especially.”

Patriot Funding is prepared to continue “doing loans the right way,” he said, adding that he and his new partners understand the current market environment, the numbers and “the difference between good and bad.”