Finding sellers for buyers.

For more than 15 years the Strategic Mortgage Finance Group Inc. - commonly known as the STRATMOR Group - has made a living by quietly buying and selling mortgage firms for its clients. its three principals, Jeffrey M. Babcock, Robert Meceda and Matthew M. Lind, specialize in "privately negotiated" transactions where STRATMOR identifies a target mortgage banker for a buyer (usually a bank) and then approaches the lender to convince it to sell. Each partner is based in a different city: Babcock in San Francisco, Meceda in Washington, D.C., and Lind in New York.

[Expanded Picture]When it sells companies, STRATMOR tends to shy away from "bid" deals where several buyers vie for one franchise, although the firm considers bifurcated deals where the servicing is bid out but the retail/wholesale structure is sold without much competition. The firm's deals are so private that it declines to identify any of its clients, except to say that some are "super-regionals." U.S. Banker contributing editor Paul Muolo sat down recently with managing director Robert Meceda to discuss the firm's business and the current state of the market for mortgage banking M&A.

USB: Why does STRATMOR find privately negotiated transactions so appealing for your clients? Meceda: When you put an organization up for sale and everyone knows about it, you immediately run the risk that the competition is going to come in and go after your sales force. This is especially true when there's a strong retail franchise involved. The sales staff could get raided. There are a number of examples where that has happened, and the franchise value of the company went to zero.

USB: What about on the servicing side? Many investment bankers like the word to be out because the more bidders there are, the higher the price tends to be. Meceda: That might be true to a degree. Good servicing is going to sell no matter what. There are a number of transactions that we're working on now where we may sell the servicing in a bid deal and the branch network privately. We did that on one bank deal last year.

USB: Does STRATMOR tend to represent more buyers than sellers? And what about your client base? Banks? Mortgage companies? Thrifts? Meceda: Generally, we represent both buyers and sellers, but during the past two to three years we've been representing more buyers, mostly banks, which have been the biggest buyers during that stretch.

USB: Thanks in part to the decline in rates and refinancing fears, prices have slipped a bit lately for servicing and franchises, How has that affected things? Meceda: If you have a good mortgage banking franchise that is doing a nice-sized volume in a growing market, you will still do well, especially if your margins are good.

USB: How does STRATMOR pick companies that want to sell? Meceda: The first thing we do is sit down with our client and ask them how much larger they want to be, and in what markets. What we do first is identify this criteria. Then, based on what they tell us, we identify companies that meet their needs and go have a quiet talk with them.

USB: And what do you tell these companies? Meceda: We basically outline for them the benefits of selling - that a buyer can do great things for them.

USB: STRATMOR also does some consulting work, counseling mortgage bankers on strategic planning and the like. What do you see out there now? Is it true that no one is making any money originating one- to four-family loans these days? Meceda: That's true - no one is making any money originating loans. They make the money from the servicing, by generating servicing rights.

USB: Do you believe that eventually a mortgage company will have to be a "mega-servicer" to survive? And that soon we may have only 10 mortgage banking firms left? Meceda: Well, I don't believe it's going to be that dire. But I do think that by the end of the decade, we will see 25 large servicers controlling a bulk of the "A-paper" market.

USB: what about everyone else? Meceda: I think we will then have lenders specializing in doing the "tough" loans, the B&C credits, affordable housing, ethnic marketing, those types of things.

USB: What about the loan brokers? Will they survive? Will technology hammer that business? Meceda. I don't think so. Loan brokers have shown tremendous resiliency...Brokers are much more skilled at opening relationships to the real estate community , the realtors, the builders, and that has allowed them to survive.

USB: So you believe the mortgage banking arena will be filled with whales and minnows? Meceda: To a degree. The middle-sized players are rapidly disappearing. I think one thing that could occur is that we will see a new type of mortgage banking firm emerge, a firm that will be a marketing specialist.

USB: And what will this marketing specialist do? Meceda: One of their top chores will be to develop "leads" for the Countrywides and the Norwests of the world (Countrywide Funding Corp., the giant California mortgage banker. and Minneapolis-based Norwest Corp.) They will be skilled marketing professionals who will identify potential homebuyers - and they will do nothing else. And they will do this by using technology, especially database technology.

USB: Let's talk about technology for a moment - where do you see it going ? Meceda: Technology is key. Firms that adopt technology and become low-cost providers will be the ones that survive. But technology alone will not do it. They have to be nimble. Being a big tech investor will not make up for lack of marketing, for example. If anything is certain, it's that the mortgage industry is not known for being good marketers.

USB: What about these new point-of-sale systems that allow big wholesalers to originate loans through a realtor using a camera attached to a computer? Meceda: We've seen the Intel system that you've mentioned, and it's likely going to be a technology that grows in acceptance, especially as our kids, the ones who've grown up with computers, hit homebuying age. But POS (point of Sale) will not be everything. There's one study that realtors have done that found that 35% of homebuyers come to the realtor's office with a lender already in tow - that's a substantial number. The question for the originator then becomes: How did the lender get identified? Through an advertisement? Affinity group? Direct mail?

USB: It seems the mortgage banking landscape is changing rapidly... Meceda: Oh, it is. Who knows? Maybe banks will soon disgorge themselves of all the mortgage firms they've been buying. Maybe management will tire of the volatility the industry faces. Maybe fast prepayment spreads and falling rates will be the thing that drives the banks crazy.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER