We bring you our latest thinking on a number of topics related to the mortgage and auto industries, including an in depth discussion on integrations (M&A) and some of the key considerations and strategies that should be analyzed as part of any integration effort.
Principal - Consumer Finance Group
Market dynamics point to opportunities in mergers & acquisitions
In late 2011 and 2012 M&A activity began to increase in the consumer finance industry. This is being driven by a number of factors that have driven up the cost and risk in the industry. The impact overall to changes in the market has resulted in several prominent firms exiting the industry with others currently pondering their future. With uncertainty and risk often comes opportunity and several players have used this period to acquire operations of companies exiting the business or to pursue growth through M&A activity. While these factors may create opportunity for mergers and acquisitions, the ability to successfully integrate organizations and realize synergies will possibly, in the long run, be a factor in whether any deal is a success or failure.
Do you have the right people at the table?
The perfect storm for mortgage servicing rights (“MSR”) valuations has hit and has hit hard. MSR valuations for seasoned portfolios have significantly declined as a result of historically low interest rates (increasing prepayment speeds and reducing float income), elevated servicing costs, scrutiny of ancillary fees assessed to borrowers, and higher expected capital requirements. These changes can have a significant impact on market risk as most industry participants hold their MSR asset at fair value for financial reporting purposes. Due to the incredible pace of change occurring in the servicing industry, it is increasingly important to establish and maintain connectivity throughout the organization between finance, capital markets and operations. A break in this connectivity can be extremely detrimental to a company and may result in negative consequences such as improper pricing decisions, financial misstatement or reliance on inappropriate risk measures.
Are you being priced out by the competition?
While other asset classes have been struggling for growth, the auto finance industry has been enjoying a period of expansion that has seen new entrants challenging the market share and position of industry incumbents. Additionally, several existing players have retooled their originations engines and have aggressively increased their market share over last year. This activity had been driven by a mixture of booming auto sales and delinquency and loss rates that are at record lows and that make the sector extremely attractive to many lenders. The sector has seen the national auto loan delinquency rate drop during the second quarter of this year to 0.33% (the lowest level since 1999 when the credit reporting agency Trans Union began tracking the statistic). With the overall level of competitive pressure on the rise, successful lenders will to need focus on how best to grow originations volume responsibly against a clearly articulated risk appetite.
How imminent is “eminent domain”
The enduring effect of depressed home values, coupled with a frustration over perceived inadequacies in relief programs for homeowners, is motivating some local governments to take matters into their own hands. The full extent of local governments’ consideration of eminent domain strategies has not been disclosed, but discussions with local governments in a number of states, including New York, Florida and Nevada, have been reported. Though difficult times necessitate creative solutions, the plan under consideration, namely, “eminent domain authority,” has raised concerns about setting dangerous precedents in the mortgage industry.