2023-08-13 06:15:07
The Intercontinental Exchange moved one step closer to realizing seven-year dreams of transforming the US home loan market this week, after a US regulator withdrew its opposition to its $12 billion acquisition. from mortgage software specialist Black Knight.
For others in the mortgage market, however, the move has failed to allay concerns about the control ICE will have over technology that could become the backbone of a fragmented $12 trillion industry.
Last Monday, the Federal Trade Commission agreed to end a court case aimed at halting the ICE-Black Knight deal on antitrust grounds. The move followed two planned divestments of Black Knight units. A final deal is due later this month.
Under the leadership of founder and CEO Jeffrey Sprecher, Atlanta-based ICE has grown from operating commodity exchanges and clearinghouses to becoming a vast data-focused business that spans everything from bond prices to running the Stock Market. of New York, and now the mortgage industry.
ICE gained control of mortgage data repository MERS in 2016 and purchased loan origination platform Ellie Mae for $11 billion in 2020. The deal by Black Knight would mark its largest purchase ever and take cumulative investment in the mortgage industry to more than $23 billion.
The lure for ICE is the chance to apply its expertise in market automation to a notoriously complex process.
More than 4,000 lenders made US home loans last year, 60 percent of which were made by independent mortgage companies, not banks.
Applying for a loan is cumbersome, involving several rounds of wrangling over paper documentation such as tax returns and credit scores, all while the lender’s own borrowing costs change along with interest rates, which have more than doubled. in the last two years.
Once a deal is complete, loan payments must be monitored, while regulations stipulate that documents must be stored for several years.
“There is only a single-digit percentage of mortgages today in this country that have gone through a digital nota process. That’s the opportunity,” Sprecher said at an industry conference two months ago. “Our goal is to be able to provide software that can support a mortgage while you complete the application. Right now, it’s about a 60-day process, even for the most eligible and capable.”
The potential for a streamlined process has excited many in the industry, particularly smaller players who don’t have the means to develop their own technology, while high interest rates have greatly affected demand for new home loans.
Black Knight’s remaining units, after divestitures, include market data as well as products that help with post-trade loan servicing.
“They’re definitely going to be a major player,” said Patrick Moley, an analyst at Piper Sandler. “When you combine ICE’s experience in electrifying the fixed income and equity markets, and an outdated mortgage industry, it’s a good deal in the long run if they can reduce some friction in the industry.”
ICE estimates that about 30 percent of its revenue will come from its mortgage technology unit after the Black Knight deal, with a larger chunk of that coming from recurring sources such as software leases.
This would leave the group less exposed to the ups and downs of the property market, especially at a time when rising interest rates have weakened property market activity. Operating profit in ICE’s mortgage technology segment was $99 million in the second quarter, down 28 percent from a year earlier.
Beyond the potential to streamline the industry, ICE executives have also discussed creating marketable products based on the company’s new trove of data.
Last year, ICE launched mortgage futures based on its own tracking mortgage rate index, as an interest rate hedging tool.
“What ICE is really good at is monetizing data, and this gives them even more data to monetize,” said Andrew Bond, a senior equity research analyst at Rosenblatt Securities.
However, the deal faces strong reservations in the US mortgage industry, where small lenders are particularly concerned that ICE’s dominance will make it difficult to switch technology providers and could increase their costs. When the FTC filed a lawsuit to block the deal in March, it said it would increase costs for lenders and homebuyers.
“Our members feel very vulnerable because these services are so integral to their operations and the transition is very difficult and problematic,” said Scott Olson, executive director of Community Home Lenders of America, whose members have reported grouping pressure from ICE. , where they are pushed to buy services they don’t want in order to get the ones they do want.
ICE did not respond to a request for comment on this point.
Black Knight is in arbitration with PennyMac, one of the largest independent lenders, for what it considered to be anti-competitive practices designed to maintain Black Knight’s market leadership position.
David Stevens, a former head of the Mortgage Bankers Association and a commissioner of the Federal Housing Administration in the Obama administration, worked directly with ICE officials as a member of the MERS board when the exchange group took control. He also expressed reservations about the Black Knight deal.
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“I am a big fan of ICE. They are very intelligent people, but this is related to fundamental aspects. [market] implications,” he said. “Here we have a very sophisticated, very competitive company given the opportunity to become the largest monoline entity in the mortgage technology space, which theoretically could start to crowd out newcomers.”
Financial risk specialist Clifford Rossi, a veteran of several large lenders and a professor at the University of Maryland, suggested that financial regulators could make a strong case for designating ICE as systemically important because of its broad reach in the mortgage market, a label that involves additional supervision.
“By concentrating the technology solution in the hands of, say, one or two vendors, you put more pressure on the [system] plumbing,” he said, adding: “If there is a hiccup at source or in the service process, that can have quite significant adverse impacts not only on businesses, but downstream customers as well.”
Read More: ICE’s $12 Billion Mortgage Tech Deal Puts Weight on US Home Loans
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