The “Golden Ticket,” of course, is the pass that allows the owner to get into Willy Wonka’s Chocolate Factory. Once in the factory, the visitor might see the Everlasting Gobstopper and wonder how much a candy is worth that not only changes colors and flavors when sucked on, but also never gets any smaller or disappears. Lenders are not immune to becoming smaller or disappearing, either. What would a lender be worth if it had attributes that other lenders did not, or that were highly coveted by a potential buyer?
The owners of mortgage companies often have a hard time understanding what their company is worth, and the various components of value. In fact, STRATMOR spends a great deal of time on those types of questions. But for a “rank and file” employee, this information is even harder to ascertain, and for an originator thinking about making a move, the value and stability of the company he or she might move to is an important consideration. For smaller lenders, especially those without any servicing rights, having an Agency “ticket” may be the component with the most value… the “Golden Ticket.” But why? And what is a “ticket?”
The term “ticket” is slang for the ability of a lender to either securitize particular loans (FHA and VA loans, for example, putting them into a GNMA security (Ginnie Mae, or Government National Mortgage Agency) or sell the loans directly to Freddie Mac (FHLMC, for Federal Home Loan Mortgage Corporation) or Fannie Mae (FNMA, or Federal National Mortgage Association).
But reaching the point of establishing the ability to securitize loans into a mortgage-backed security takes time, effort, and financial stability. For this reason, it has value for a potential buyer who wants a faster inroad into the ability to do such things in the capital markets.
Ginnie Mae, Fannie Mae, and Freddie Mac continually evaluate a lender’s qualifications by reviewing its financial condition, organization, staffing, experience, written policies and procedures, and other relevant factors. And if a company ends up selling to another party, there is a change of control provision that will require the Agencies to approve that change.
Lenders who apply for Fannie or Freddie seller or seller/servicer approval, in Fannie’s case with a $5,000 application review fee, engage in a two-stage approval process. Approved lenders can sell loans (servicing released only). But the goal for many lenders is “Full Approval” and those seller/servicers can service loans.
But a potential buyer of a lender with Agency approval is typically seeking to expedite the process, the key element being the time it takes Freddie or Fannie to process the application. The review time is dependent on an applicant’s ability to provide a complete package and timely responses to requests for additional information, and the Agencies tell applicants that it is better to have a single point of contact to drive the process. (Full details for applying are well spelled out here: Fannie Mae and Freddie Mac.)
Doing business with Ginnie Mae is more time consuming and, for some lenders, has more hurdles than becoming approved by Freddie Mac or Fannie Mae. The applicant must certify at the time the application to Ginnie Mae is filed that it is an FHA-approved mortgagee in good standing and provide its FHA mortgagee identification number. The applicant must have held their FHA approval for at least three years. Once approved, a Ginnie Mae Issuer must meet the requirements described in MBS Guide, Chapter 3 in order to maintain Ginnie Mae approved status.
From the start, Ginnie’s process can take 6-12 months, depending on the backlog of other lenders seeking approval, as well as government agency staffing and urgency. Time is money, and thus in most cases Ginnie approval is more valuable than Freddie or Fannie’s. Consultants claiming to be able to speed up the process should be viewed cautiously, as government agencies tend to focus on the process rather than any sense of urgency.
Because of the time and effort involved, a lender having a ticket with one or more of the Agencies has more value in the marketplace, as well as more perceived stability. David Hrobon with the STATMOR Group noted that all things being equal, an “average” seller’s tickets are worth approximately $500,000 each (Fannie Mae or Freddie Mac) and up to $1 million or more for GNMA. Note, this is in addition to the base value of the franchise and or the balance sheet associated with the entity.
David went on to say, “The prices could be higher if the seller’s profile includes such things as a low historical production volume, high quality control results and loan performance, tight credit standards, favorable geography, substantial net worth and a seller who is willing to assume a longer and larger tail for trailing liabilities. The value of a lender’s ticket(s) would be lower if the opposite of any of these components applied. The buyer will assume all the seller’s contingent liability since it will be a stock transaction.”
Interestingly, David went on to say, “Buying a company that originated $500 million in total for the past five years will have significantly lower future liabilities (investor push-back demands due to fraud or manufacturing defects, EPDs, EPOs, etc.) than a seller that funded $5 billion over the same timeframe, assuming loan quality is the same.” Thus, a smaller lender’s ticket(s) may actually have more value than a larger lender!
Of course, Agency tickets are only one component making up the worth of a company. Lenders are often worth more than what’s on the balance sheet, and more than simply the value of servicing. While servicing certainly can add value to a mortgage company, it certainly is not the only driver of value. In fact, there are plenty of buyers who prefer to acquire smaller companies that do not have servicing. Instead, the seller’s ability to achieve consistent net income margins and sustained profitability is one of the most compelling value elements, and a component of that is successful secondary marketing which includes the ability to sell directly to the Agencies or issue securities, and that means having the Golden Tickets.
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