Berkery Noyes’ 2009 Recap and 2010 Predictions For the Mortgage Technology Market

The very busy pace of M&A activity in 2009 launched a trend that we expect will accelerate in 2010 and 2011. Lenders, vendors and servicers to the mortgage industry will continue to embrace tactical acquisitions to shore up product lines, capture customers, increase market share, and ensure they are prepared for the next wave of forward mortgage originations. Further fueling M&A activity is the accelerating vendor movement towards becoming a complete end-to-end solution provider.

Additionally, more stringent lending guidelines and regulations are shifting the paradigm, increasing the need for compliance, fraud prevention and risk-mitigating technology solutions – which are now the cornerstone of the mortgage process. In today’s market, the burden of ensuring proper compliance moves to the point of sale rather than merely at closing, and falls on all mortgage industry participants.

Prior to the credit crisis, many market participants viewed compliance and auditing solutions more as a “like to have” product offering and less of a “need to have” solution. The focus on fraud prevention and risk mitigation has never been stronger as compliance solutions are elevated to the need-to-have category.

For evidence of these trends, look no further than the following list of selected M&A transactions which closed in 2009:

  • First American CoreLogic acquires BasePoint Analytics, LLC

    • The merger is consistent with First American’s strategy of improving the fraud-detection process for their clients
    • The integration will deliver a new wave of predictive analytics to the marketplace, which will assist lenders in identifying suspected fraud early in the lifecycle of the loan
  • Ellie Mae acquires Mavent Inc.

    • The acquisition enhances Ellie Mae’s commitment to offering cost-effective solutions to manage regulatory and secondary market risks
    • Joining Ellie Mae will better position Mavent to help all types of mortgage businesses to navigate the regulatory and market changes lying ahead
  • ISGN Solutions Inc. acquires Loan Fulfillment Solutions from Fiserv, Inc.

    • The acquisition allows ISGN to achieve economies of scale and depth in the mortgage technology market by being more of a one-stop vendor for all loan life cycle requirements
    • The merger will allow ISGN’s customers to focus on loan profitability while working with a trusted partner
  • Wolters Kluwer Financial Services acquires Stormwater Research Group

    • The acquisition will allow Wolters Kluwer Financial Services to expand and strengthen its presence in the flood determination step of the mortgage lending process
    • The transaction will allow Stormwater customers to have access to a comprehensive up-to-date, online database that provides flood determinations compliant with all federal flood regulations
  • Paladyne Systems, Inc. acquires Oakwood Financial Technologies, LLC

    • The deal expands Paladyne’s technology platform as they now are able to introduce Paladyne Credit Master, which is based on Oakwood’s technology
    • The combination provides customers with a highly efficient and cost-effective solution for managing the entire lifecycle of trading bank loans and other asset classes
  • Equifax Inc.acquires Rapid Reporting Verification Company

    • The addition of Rapid Reporting will enhance Equifax’s ability to provide mortgage-related employment verification services
    • The transaction will enable Equifax to compete more effectively in a rapidly changing market and offer more even more effective, value-added fraud verification services
  • Century Capital Management, LLC makes a “significant equity investment” in Digital Risk, LLC

    • Century Capital Management sees significant demand for Digital Risk’s credit risk and fraud prevention solutions, as financial services firms subject to credit risk will benefit from lower losses and better margins by using Digital Risk’s systems
    • The transaction provides the runway for growth that will enable Digital Risk to continue in its position of innovation and leadership as the credit markets undergo the most important changes since the Great Depression
  • Mortgagebot acquires Netupdate from Most Home Corp.

    • The acquisition allows Mortgagebot to strengthen its client base of banks, thrifts, and credit unions to more than 900 organizations nationwide
    • The transaction unites the leading two providers of online lending technology in the mortgage industry
  • Headstrong Corporation acquires Lydian Data Services

    • The acquisition is strategically timed to take advantage of current turmoil in the mortgage industry as the need to improve risk reduction and reduce fixed costs for loan fulfillment and review
    • The acquisition strengthens Headstrong’s processing system for financial institutions and bolsters their financial service capacities

The mortgage technology industry is still highly fragmented, and we anticipate continued consolidation over the next several years. Industry participants will seek economies of scale, critical mass and “need to have” product offerings to enhance their competitive advantage. We expect the following two main drivers to bolster M&A activity in 2010:

  1. Further acquisition of compliance, fraud prevention and risk mitigating solutions; and
  2. Acquisition of niche mortgage companies, as larger vendors seek to offer fuller end-to-end solutions.

The mortgage technology market, along with the wider financial services and regulatory/compliance solutions sector will be among the strongest business segments in terms of mergers and acquisitions activity, and will lead the coming resurgence in mortgage technology industry consolidation.

While we expect transaction volume to accelerate over the next 12 to 18 months driven by strong buyer demand, we do not expect a pricing bubble such as the one we experienced in 2006-2007. Enterprise valuations – expressed as a multiple of EBITDA (earning before interest, tax, depreciation & amortization)—are likely to remain stable at current strong levels.

Berkery Noyes is the only middle-market investment bank with research and M&A transaction teams dedicated to the mortgage technology, regulatory and compliance market. No transaction advisor has more experience in this niche, nor a better record of success in securing and closing sell-side and buy-side financial regulatory/compliance technology transactions.