A huge year for M & A.

Author:White, Brenda B.
Position:Deal Talk - Merger-and-acquisition - Column

In January 2006, I wrote a column that discussed merger-and-acquisition (M & A) activity within the mortgage banking industry in 2005. As we begin 2007, it is time once again to step back and examine the wave of consolidation that took place in the mortgage banking industry in 2006, and discuss the outlook for the year ahead.

For M & A activity, 2006 was one of the busiest years the mortgage banking industry has witnessed in recent history--both in terms of number of deals and value. According to SNL Financial, Charlottesville, Virginia, there were 47 transactions announced through Dec. 1, 2006 (see Figure 1), compared with 31 deals announced in 2005.

The aggregate value of the 15 deals for which pricing was disclosed in 2006 totaled more than $36 billion.

Approximately two-thirds of the aggregate value was attributed to the acquisition of large thrift/megalender Oakland, California-based Golden West Financial Corporation by Charlotte, North Carolina-based Wachovia Corporation, while six acquisitions represented less than I percent of the aggregate value. The remaining eight transactions represented more than $12 billion, far exceeding the value of announced deals for which pricing was disclosed in 2005 and 2004.

The continued flattening and inversion of the yield curve, coupled with declining origination volume, helped hasten the pace of consolidation in the latter half of 2005. By the beginning of 2006, the impact of these factors became even more pronounced when combined with the wave of loan repurchase requests many mortgage companies began receiving from Wall Street firms that had purchased their loans. Numerous financial services companies with exposure to the residential mortgage industry began to consider strategic alternatives:

* Unable to operate profitably as a result of deteriorating operating conditions and abnormally high repurchases, many independent mortgage banks have seen their net worth erode in the past 18 months. Rather than risk violating their warehouse covenants or collapse into a position of insolvency, many independent mortgage banks such as Lake Forest, California-based Chapel Funding LLC and Carmel, Indiana-based Oak Street Mortgage LLC sought to merge with stronger counterparts in an effort to help strengthen their financial positions. While independent mortgage banks represented more than half of all sellers in 2006, they did not account for any major change in market share.

* Forced to pay out a large portion of their earnings to shareholders, and, in many cases, shut out by the equity markets, many mortgage real estate investment trusts (REITs) struggled to replenish their capital bases. Many were largely unsuccessful in tackling the depressed profit environment. The most severely affected companies were forced to reconsider the benefits of maintaining their REIT status. Last year saw five of the 26 publicly traded residential mortgage REITs--including Irvine, California-based ECC Capital Corporation; Glen Allen, Virginia-based Saxon...

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