The recent run to the IPO window by independent mortgage bankers brings back past waves of long-ago expired names who counted on the Street to feed cash into their businesses. There has been no better environment to execute that move than now with the lowest rates in our lifetimes and surprisingly strong purchase demand. Never before have these two events coincided.
Quicken led the way with the heralded IPO chumming the waters for the rest. But Quicken is unique. They are the most consumer-direct organization with the sole national brand in the business. They think differently; growing from within, leveraging technology, and driving their customers back to realtors and builders. They have a strong vertical integration and truly don’t ‘compete’ with others outside of wholesale. Retail lenders rarely lose to Quicken, but their customers don’t frequently shop around.
The rest of the IPOs are warmed-over versions of the same models we have seen for decades. Its true Loan Depot is trying desperately to be Quicken, but as their last attempt at IPO years ago uncovered, under the hood, it still walks like a duck. Maybe the debt raise is the better option?
What do these firms get from going public? Most of the cash in these deals is going back to the private equity investors who backed them. It's not to supply a war chest for growth. Access to the capital markets, in theory, may allow growth going forward, but will the markets give them the valuation to leverage when rates go up and margins go down?
Markets expect domesticated animals who behave predictably. Independent mortgage companies are wild animals who refuse to be tamed, with turbulent fluctuations and credit/regulatory risk. Having worked for public firms, I’ve seen the pressure to meet earnings expectations and the short-sighted decisions that come from it. It usually ends up with growing for growth's sake and pushing the credit envelope for volume and margin.
Numerous times not chasing risk or forcing growth is the right move. That won’t be an option for these companies. Many of us will become victims of losing loans, losing margins, or losing good employees to them before they crash. The management on top will get their packages, employees will be forced to find a new home, and find that their stock is worthless.
This low-interest rate environment could last longer for all the wrong reasons. This wave of IPOs could also last longer for all the wrong reasons. Expect a wave of consolidations based on this liquidity and now necessary desire to show growth. Disruption is healthy but painful. Opportunities will be created for all.