As part of its disposal of U.S. consumer banking businesses, HSBC Holdings PLC is shopping HSBC Mortgage Corp. around. As with many yard sale offerings, the property's attractiveness is up for debate.
Last week, HSBC announced it was considering "a sale, merger or other business combination" of its U.S. mortgage unit, which originated $1.4 billion of loans in the first quarter.
The reaction to the availability of such an asset will be a concern for not only HSBC but the mortgage industry itself. Though there is consensus that the business is going on the market at a transitional moment, banking analysts hold conflicting views of whether the origination industry is primed for growth after purging itself of sloppy competition or is in for an extended malaise. If the rosier view takes hold, HSBC Mortgage should draw interest from a range of midsize banks looking to quickly increase scale and from private-equity buyers.
"The industry is profitable today, but it's standing on the doorstep of an opportunity that's still to be developed," said Tom Piercy, managing member at Interactive Mortgage Advisors. He pointed to reasonable interest in the Federal Deposit Insurance Corp.'s planned sale of servicing rights on $23 billion of AmTrust Bank mortgages.
If regulators and the market can repave the way to securitization, that could provide a significant boost. Even in the meantime, Piercy said, conforming mortgages now offer a steady, long-term investment. With interest rates at record lows, he said, lenders are now expecting durations in excess of 10 years for new originations, providing an inordinately long stretch of servicing income.
"If we can keep our heads about us, with the spreads being embedded, this is a good place to be in," Piercy said. Others are skeptical that anyone would pay much to wade into the market at a time when the government-sponsored mortgage market is slated for an overhaul and the broader housing market is still in precarious, and uncharted, territory.
"Very little is known about how the mortgage business is going to end up," said Nancy Bush of NAB Research, citing both the GSEs and the consumer safety regulation implications of the Dodd-Frank Act. With the nation's biggest servicers — Wells Fargo & Co., JPMorgan Chase & Co. and Bank of America Corp. — still absorbing mammoth origination operations picked up during the financial crisis, the pool of potential acquirers would likely be restricted to midsize banks looking for a bargain.
"God almighty, there couldn't be a worse time to sell a mortgage unit," Bush said.
Of course, exactly what is for sale isn't quite clear. HSBC Mortgage employs around 1,500 people, and serviced a portfolio of $49 billion in loans at midyear. Though the company raised the prospect of selling "substantially all" of its operations and assets, a statement from spokesman Neil Brazil to American Banker said that "maintaining the status quo" was among the range of HSBC's alternatives.
A sale would be in keeping with the company's recent de-emphasis of retail banking in the U.S. Michael Geoghegan, HSBC Holdings' CEO, told analysts this month that it intended to use its U.S. operations to serve internationally minded customers.
In the U.S. domestic market, "frankly we haven't got any right to win," he said.
Joe Garrett, principal of Garrett & Watts, a San Francisco mortgage banking consultancy, said other banks are increasingly interested in giving the sector a shot.
"There are commercial banks that would never have thought in a million years that [originating mortgages] is what they want to do, and now they're starting to look at it as a decent place to put their money," said Garrett, who worked with Farmers and Merchants Bank of Hannibal, Mo., in a recent mortgage operation acquisition and said he's now assisting a more sizable bank with a similar aim.
Among the sector's charms in the current environment is the warehousing process, which temporarily shelves mortgage assets yielding between 4% and 5% on a bank's balance sheet.
Given near-zero interest rates and the continued weakness of lending areas like commercial real estate, similarly profitable ways to deploy capital without taking on interest rate risk are in short supply, he said.
Piercy saw potential for a good sale price on similar grounds, though he noted that there aren't many precedents for banks or others paying for production. Servicing assets — HSBC values its own in the U.S. at $347 million — have been able to command better prices.
But whatever the interest in HSBC's mortgage unit, Garrett said, apprehension about the effects of regulatory reform mean the sector is likely to notch more deals with banks as acquirers.
"Whatever the rules are, they're not going to be as stringent for a commercial bank as for a mortgage bank," he said. "Give regulators a hammer, and they see nails everywhere. Independent mortgage bankers are trying to sell out now."
