Is it time for mortgage lenders to sell the farm?
The good news is that your mortgage lending business has a very large net worth. Your servicing portfolio has become a very large asset which seems to be gaining value every day. The bad news is that your cash resources are becoming depleted in a down market where business ain’t what it used to be. You have laid off non-essential employees; cut your costs and implemented a new business plan that will return your company to profitability. Yet you can see that with your company securitizing all of your production, your cash may drop to an uncomfortable level.
The question becomes what to do? The good news is that a new breed of investment vehicle has arrived on the scene. It is designed to help mortgage lenders which have meaningful servicing holdings and have a need for cash in their companies. In addition it should be noted that these bankers could gain instant liquidly by selling some or all of their servicing but are not interested in this alternative.
So how does this transaction happen?
The lending bank or financial institution will do an in depth analysis of the potential borrowers company. It will consider most or all of the following:
- Business plan
- Cash flow at current volumes
- Servicing stats
- Past financial reports
- Projected financials
- Value of servicing
- Total servicing advances
- Interviews with top management
- Conversations with past investors
Provided that there is a green light, a commitment will be issued and after receipt of all additional items or exhibits, a closing is set.
The following are generally the dynamics of the loan:
- 50-80% advance on the value of the portfolio
- Interest-only for a period of time
- Loan amortizes after interest only period on a 10 year AM with a 5 year call. Please note this can vary from financial institution to financial institution.
- Loan amounts vary from institution to institution. Expect something generally between $5 million – $50 million.
- Interest rates vary based on total banking relationship (i.e. deposits etc.)
- With some financial institutions guaranty can be waived depending on the value of the company
- Time to close is usually 45-60 days
Some institutions require that the entire amount be drawn and others do not demand this.
The following are some of the benefits to the mortgage banker:
- Some institutions will allow a dividend to the owners of the company with some of this money;
- By not selling the servicing there is no taxable event;
- Enjoy the best of all worlds in that the lenders gain liquidity. Also, the value of its servicing holdings can go up.
- The borrower is now able to buy other companies; servicing; expand the company; make distributions with the money and so on.
While most mortgage bankers will suffer in the current market slowdown, those who use this technique to bring in cash to their companies could well find they don’t have to sell the farm but, instead, become “king of the castle.”