Rob Chrisman's Perspectives


Need Help?

Let us light up your strategy discussions.

Lenders and Vendors Going Public: Pros and Cons

By Rob Chrisman, Senior Advisor

Of the roughly six thousand lenders (based on HMDA data), very few think about “going public.” That said, there several dozen companies involved in residential lending that, if you wanted to own a piece of one, or many, you could easily do so. What’s behind the growing number of mortgage lenders seeking to “go public?” What is the attraction to companies like loanDepot, Finance of America, United Wholesale, Caliber, and Homepoint?

There are already dozens and dozens of companies involved in residential lending that have publicly traded stock. Bank of America, Citigroup, IMPAC Mortgage Holdings, JPMorgan Chase, Flagstar Bancorp, PennyMac Financial Services, PNC Financial Service, PrimeLending, Rocket Companies, Inc., Guild, and Wells Fargo are quick examples. Of course there are Freddie Mac and Fannie Mae.

There are also publicly traded companies that purchase mortgages and mortgage-backed securities, including those that buy Agency MBS backed by Freddie and Fannie. Think American Capital Agency Corp., Annaly Capital Management, ARMOUR Residential REIT, Inc., CYS Investments Inc., Hatteras Financial, or New Residential (NewRez). Non-Agency purchasers that are public include Redwood Trust and Two Harbors. Want to invest in servicing? Try buying stock in Nationstar Mortgage Holdings and Ocwen.

If your taste runs toward owning a piece of a private mortgage insurance company, you’re in luck. Genworth, MGIC, Old Republic, PMI Group, Essent, or Radian. Technology? Buy CoreLogic, Intercontinental Exchange (owner of Ellie Mae), Lender Processing Services, or LendingTree. Title insurance and escrow providers? Fidelity National Financial, First American Financial, Investors Title Company, or Stewart Information Services.

So investors have no problem finding places to put their money to work in residential lending: the demand is there. But what about the supply side of the equation? What are the advantages and disadvantages? And do they really need an infusion of capital?

The recent Rocket and Guild IPOs did not increase their capital. Virtually all of the $1.8 billion of gross proceeds from Rocket’s offering were used to buy out shares from existing shareholders. No new capital was raised to plow back into the business. Indeed, with more than $6 billion of cash on its balance sheet and about $1 billion of free cash flow annually, Rocket hardly needs additional capital. In Guild Mortgage’s case, about 11% of Guild’s outstanding common stock was used to purchase shares from certain Guild shareholders, in particular, McCarthy Partners, Guild’s major investor. Again, no new capital was raised insofar as Guild’s balance sheet and earnings appear to be able to support just about any foreseeable investment or acquisition by Guild. STRATMOR’s Dr. Matt Lind observed, “we see that both Rocket and Guild’s IPO served to provide an ongoing liquidity mechanism by which inside shareholders could cash out their shareholdings.”

The need for increased liquidity is satisfied as companies create a vehicle by which ownership can easily be bought and sold; in particular, a means by which insider shareholders and management can sell all or a portion of their shares. In some cases it creates and exit strategy for management or owners just as in other industries. In theory, an influx of capital can be used to acquire and implement new technology, make acquisitions, acquire bulk servicing rights, expand with bricks and mortar into a new region, or enter a new channel. Having a heftier balance sheet can improve recruitment and retention. Liquid shares can be offered to new hires or existing employees. In some cases, but not all, recruiting someone to work for a public company may be more prestigious. Providing liquid shares for bonuses and other incentives can be a real “plus” for employees.

Being publicly held may change the way firms operate. Share price, determined by supply and demand, is a function of three criteria: fundamental factors, technical factors, and market sentiment. These, in turn, are largely a function of scale, earnings growth (existing or forecast), and liquidity. Companies may try to increase share price through a variety of strategies, often contradictory. For example, making acquisitions and raising capital to finance acquisitions doesn’t fit with putting money into productivity-improving investments. Analysts and investors may believe that putting money into a new LOS, or into rate sheet pricing, will hurt short-term profits. Owners know that new hardware/software will pay off in the long-term but not in the short term.

Will analysts understand that acquiring/retaining servicing rights decreases earnings volatility and allows the company to benefit from the natural hedge servicing provides against production risk? Probably. Entering new channels (to diversify production risk, or when an opportunity presents itself) may be easier for a publicly traded company. Capital may be more available to invest in new programs or push forward initiatives like digital mortgages. Companies with more capital may seek growth opportunities more aggressively.

Any company thinking about going public “the old way” should remember that there are investment banking fees. Companies making a public offering generally pay their underwriters (usually an investment bank) a fee of 5.4 percent of the total IPO or 7 percent fees on the gross offering. And often a bank, or group of banks, put up the money to fund the IPO and buys the shares of the company before they are actually listed on a stock exchange. The banks make their profit on the difference in price between what they paid before the IPO and when the shares are officially offered to the public.

Gary Gensler has been nominated to head the SEC, suggesting a pronounced focus on ESG disclosures, diversity disclosures, investor protection, and a measured continuation of market structure reforms. The SEC and other regulatory bodies are very interested in publicly held companies, less so smaller privately held entities.

There is a new way to “play the game:” the “SPAC boom of 2020.” In this method of going public, a “shell company” (i.e., an empty corporation with no products or employees) goes public via an IPO and raises funds from institutional investors, and then seeks out private targets. When this shell company makes an acquisition, it issues so many shares that the target, not the acquirer, ends up controlling the new entity, hence a type of reverse merger. Unlike in a traditional acquisition, the target ends up controlling the new company. Also, the startup is now effectively a “public company” because the acquirer was a shell corporation. A private company would go public via a SPAC, or reverse merger, due to speed and simplicity. Since the SPAC is a shell corporation, it can complete an IPO much more quickly, like a few weeks or months instead of 6-12 months. Underwriting fees also tend to be lower, and there’s no price uncertainty.

Is “being public” a cure for lender and vendor ills? No. There is a loss of control as CEOs find themselves reporting to countless shareholders instead of a small group of owners, and control moves from that person to a board of directors. “What will the analysts think?” becomes a common question, or employees may ask themselves what the stock price is doing on a particular day rather than focusing on adding value for the coming years. Lenders and vendors may find their company’s value moving up or down based on investor’s perception of the industry rather than on the merits of the company itself. Companies may find themselves making decisions to avert risk rather than relying on the growth instincts of a strong leader. Very strong companies turn into very large companies… there is a difference.

In conclusion, even if the desire is there, smaller lenders simply lack the scale to efficiently execute an IPO. The management of larger, typically independent mortgage banking, companies view it as a prestigious goal, part of the normal progression of corporate development. And owners view going public as a way of taking some of their chips off the table in a strong market for both lenders and vendors. Regardless of the path a company takes, employees rely on senior management to make the right decisions at the right time, weighing the pros and cons of all options.

Looking for more from Rob Chrisman? Listen to the weekly Chrisman Commentary podcast. Sign up on Google, Apple or Spotify.

Would you like to speak to STRATMOR about our services? Contact us today!

Need Help?

Let us light up your strategy discussions.

What Our Clients Are Saying

Testimonial Photo
© 2022 Strategic Mortgage Finance Group, LLC. All Rights Reserved. Privacy Policy.