Selling a Mortgage Company

What a buyer is paying for

The revenue comes from origination fees, from the spread when a loan is sold to an investor, and in some companies from servicing income if loans are kept. A buyer will break revenue down by source and then by loan type, and will want to see the share that comes from home purchases against the share that comes from refinances. Purchase business is steadier and tied to real estate agents and builders. Refinance business moves with rates and can disappear quickly.

Buyers also look at what it costs to produce each loan. Loan officer compensation, processing staff, underwriting support, lead costs and technology all come out of the revenue on each file. A company that closes a lot of loans and keeps little of each has a different value from one that closes fewer and keeps more. Expect to be asked for profit per loan, by officer and by month.

Pull-through is the measure many buyers care about most. It is the share of loans that are started and then close. A company with a high pull-through is usually well run, with good borrowers and good processing, and a buyer will take comfort from it. A low one raises questions about marketing quality or follow-up.

Loan officers and the referral sources behind them

In a mortgage company the producers are the business. A buyer will ask for each loan officer's volume for the past several years, how they are paid, how long they have been there and where their business comes from. An officer who brings in a large share of the company's loans through personal relationships with a few real estate agents is a risk, because the officer can leave and take those relationships. Buyers will probe how portable each producer is.

Agreements with loan officers matter. Whether they are paid commission, salary or a mix, whether there are non-solicitation terms and what notice they must give are all things a buyer will read. Our post on non-compete agreements in a sale explains how those are treated. Rules on what can be enforced vary by state and your attorney confirms what applies.

Referral sources are the other half. Real estate agents, builders, financial planners and accountants who send borrowers to the company are an asset, especially if they send many. A buyer will ask who the top referral sources are and whether the relationship belongs to the company or to an individual. Written marketing arrangements with referral partners should be reviewed with your attorney before a buyer sees them. If the owner personally holds the best relationships, our post on owner dependency explains how to start sharing them.

The pipeline and the lender relationships

At any moment a mortgage company has loans in process, from application through closing. A buyer will want a current pipeline report showing each loan, its stage, its lock date and expected revenue. Interest rate locks create obligations, since the company or its investor has promised a rate for a period, and a buyer needs to know which locks are open on the closing date.

Who earns the revenue on loans that are in process when the sale closes is negotiated, and it is a common source of friction. The usual approaches are a cutoff date, a split, or an adjustment to the price. Our post on earnouts, holdbacks and working capital describes how those mechanisms work.

Lender and investor relationships come next. A mortgage company usually places loans with several wholesale lenders or investors, each with its own approval of the company. A buyer will ask for the approvals, the pricing and the performance with each. Some lenders require notice or fresh approval when ownership changes, and a few can end the relationship. Companies that fund loans on their own use a warehouse line of credit, and that agreement will have terms about ownership changes and net worth that a buyer and the line provider both review.

Compliance and the records buyers want

Mortgage lending is heavily examined, and a buyer will look at the compliance file in detail. Expect requests for state licenses for the company and for each loan originator, the results of any examinations or audits by regulators and investors, the quality control reviews on closed loans, written policies and training records, and a history of complaints. Requests from investors to repurchase loans, or to indemnify them over defects, are watched closely and should be listed with the outcome of each.

Insurance counts too. Errors and omissions coverage and a fidelity bond are standard, and the claims history will be read. If there has been a past problem, it is better for the buyer to hear it from you with the documents in hand.

On the financial side, a buyer wants business tax returns, monthly profit and loss statements, a balance sheet, closed loan volume by month and officer, and a schedule of fees collected. Our post on getting financials ready for a buyer covers what clean looks like. Technology agreements for the loan origination system, the customer relationship system, the borrower portal and any lead vendors need to be on the list too.

What has to transfer, and how the deal is shaped

Because licenses and lender approvals belong to the company, many mortgage deals are structured as a purchase of the company itself rather than its assets. A change in ownership usually requires notice to state regulators and sometimes approval before it can close, and the same applies to some investors. Those approvals add time, and a closing date has to be set with them in mind. The tradeoffs are covered in our post on asset sales and stock sales. Timing, and who holds responsibility for loans already closed, are matters for your attorney.

The office lease, equipment and software licenses transfer in the usual way, with landlord and vendor consent. Our post on the lease as part of the deal covers what to expect.

What tends to sink a sale

Several things recur. One top producer leaves when the sale becomes known and takes the business with them. Pull-through numbers do not hold up under review. A key lender will not continue after the change of ownership. A past examination turns up an issue nobody disclosed. The financials mix up fee income and pass-through costs. A buyer's lender reads the net worth requirement and finds it cannot be met.

Staff and referral partners should not hear about a sale by rumor. We market a company without naming it, and every buyer signs a nondisclosure agreement first. Our post on how we market a business confidentially shows how.

Getting ready

Begin by writing down, for each loan officer, what they produce and what is in writing between you. Pull together the compliance file and fix any gaps while you can. Reconcile your loan records with the books. Talk to your attorney about licensing and approvals before anyone asks. Spread the best referral relationships across more than one person. At Business Advisors of America we start with a valuation built from your closed loan history, and the page on selling a mortgage company shows how we approach it.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.