Ownit Mortgage Solutions Inc. says it found a way to deal with the nonprime mortgage market’s current challenges while avoiding the hurdles that bank-owned and public nonprime lenders face: a deep-pocketed Wall Street investor.
The Agoura Hills, Calif., mortgage wholesaler’s parent, Ownit Holdings LLC, has sold a minority stake in the unit to Merrill Lynch & Co.
Merrill and Ownit Holdings signed a letter of intent June 28, and the deal closed Sept. 16, according to William Dallas, Ownit’s chief executive and a part-owner.
In an interview Monday, Mr. Dallas said the deal diluted the stakes of Ownit Holdings’ management team, which previously owned roughly 30% of the unit, and the Chicago private equity fund CIVC Partners LP, which owned the rest.
He said that Ownit “will continue to operate” as an independent company.
Mr. Dallas said a confidentiality agreement barred him from releasing more specifics of the deal, including the size of Merrill’s stake, but he said Ownit was valued according to its pretax earnings for the last 12 months — a figure he put at between $50 million and $100 million.
Last year, he said, Ownit Mortgage sold about half of its $4 billion of production to Merrill. “We will give Merrill that same ability” to buy production, though Ownit is under no obligation to sell loans to Merrill.
Ownit is on track to fund $8 billion of loans this year, or 10 times its production in 2003, the year Mr. Dallas and the other investors bought it.
A Merrill spokesman confirmed that it had bought a stake in the wholesaler.
“Merrill Lynch is active in the mortgage-backed securities market in many areas. We are always looking to establish strategic relationships with quality firms,” a Merrill spokesman said.
The deal not only brings Ownit more capital but, Mr. Dallas hopes, will also get the company better execution on its mortgage securities.
This is because, as opposed to packaging Ownit’s loans with loans from other lenders, the investment bank will now segregate Ownit’s loans into Ownit-only deals.
Mr. Dallas said that this will enable the company’s proprietary Right Loan products to prove that they perform better than competitors’ loans, which should improve execution.
“We like to get paid for our credit quality in an industry that pays you for your weighted average coupon,” he said.
He also said the Merrill deal brought Ownit a new, larger warehouse line than its $900 million line with JP Morgan Chase & Co., set to expire later in the fall, which will help it grow in the future.
Ownit, he said, plans to increase production by 20% next year, to $10 billion, and expand into untapped markets in places like the Midwest, the East Coast, Texas, and Florida.
Meanwhile, the deal comes in the midst of a challenging time for nonprime lenders, who are being buffeted by intense price competition, an unfavorable yield curve, and the specter of predatory lending allegations.
For instance, New Century Financial Corp., a top nonprime mortgage lender, slashed full-year earnings guidance Sept. 23, citing continued compression of its production operating margin. Analysts have said the profit warning signaled challenges ahead for the whole industry.
Another plus in the deal is that unlike a bank-owned subsidiary, Ownit Mortgage, which currently has 14 offices, will remain independent and thus does not have to deal with interference from a parent bank or with the hassle of a compliance policy dictated by bank executives, said Mr. Dallas, who founded First Franklin Mortgage (now owned by National City Corp.) in 1981.
