A little over three years ago insurance giant MetLife looked like a genius. It stuck its toe in the mortgage banking pond by purchasing the production arm of First Horizon, some of its MSRs, and kept adding to the business.By early 2011 it could boast that it ranked 12th in originations and 10th in servicing. In short, it bought a well-respected franchise at the bottom of the market and had little in the way of “legacy” problems to contend with. Profits were decent, but not exceedingly so.
In the summer when the insurer announced that it would sell its New Jersey-based bank, it clarified that it would stay in mortgage banking. Then it changed its mind. But why?
The answer to that question has yet to be fully explained. All clues point to Steven Kandarian, who was promoted to CEO of the parent company in March. The general belief is that Kandarian looked at the risk/rewards of both banking and mortgages — not to mention the regulatory burdens— and concluded that MetLife could do better elsewhere.
Now the hard part comes: selling a mortgage banking franchise during a time when investor demand is weak. What makes the situation even odder is that mortgage origination profit margins are the best they've been in years, although production volumes are low. Investment banking advisors I spoke with generally agree that the “easy” part for MetLife will be selling the 250 or so retail and wholesale offices that belong to MetLife Home Loans, which is headquartered in Irving, Texas.
I say “easy” but that hardly means the MLHL production network will be sold at a premium. Good LOs and account executives are always in demand, especially if they have strong ties to Realtors and builders. But as one M&A specialist told me: “I'd be surprised if they get any consideration.” Translation: Who cares if production profit margins are high? Originations are tepid. Why pay up? If you need LOs, just hire them.
Why pay up, indeed. At last check at least two firms — PNC Bank and credit card giant American Express—were kicking the tires of MLHL. Both declined to comment for this column, as did MetLife.
After years of hating the mortgage business, PNC suddenly sees value in home finance, though it's staying clear of warehouse lending. (MetLife Home Loans (MLHL) also has a warehouse division.) American Express, sources said, has been eyeing the business (on and off) for years but without signing any checks.
As for MLHL's $85 billion MSR portfolio, that's a different matter entirely. But first let's state the obvious: no one in their right mind believes that MLHL will be sold in one piece. Production will be sold separately from servicing. And if the parent doesn't like the MSR bids it may just outsource the whole business to someone like Nationstar Mortgage or Green Tree.
There are numerous problems with selling MSRs in today's market for the obvious reasons: uncertainty over the future of Fannie Mae and Freddie Mac, uncertainty on servicing compensation, a pending servicing settlement with the states, and the list goes on and on. As any veteran mortgage banker can attest: servicing contracts are no longer the liquid asset they once were. Blame the GSEs or the Basel III accords—take your pick.
So, where does this leave MLHL? In purgatory, probably. If PNC or American Express offer only a token amount for the production network it's possible the insurer might change its mind and stay in the business.
And what about MetLife Bank? It only has one retail branch. Who wants a bank with only one branch unless you already have a bunch of branches and you need assets? But if the bank sells, who will fund the mortgage company?