Magazine article Mortgage Banking

Nowhere to Go but Up

Magazine article Mortgage Banking

Nowhere to Go but Up

Article excerpt

There's one thing great about being at the bottom--there really is nowhere else to go but up. That is how it felt at the Mortgage Bankers Association's (MBA's) National Technology in Mortgage Banking Conference in Chicago in April. It was perhaps MBA's smallest tech show since the early 1990s, as best as I can remember.

The attitude was different at this show compared with last year's. Before, we were all wondering what the next tidal wave would be and who would survive it. The seas have calmed now. We no longer expect another big storm or more big waves. That's the good news. However, the tide is still out and everyone knows it'll be a long time before all the boats will be lifted once again. Further, as I once heard former Countrywide Financial Corporation Chief Executive Officer Angelo Mozilo say, "When the tide is out, you see who's swimming naked."

There were a lot of companies that didn't have a booth this year that had been regular exhibitors in years past. Perhaps they are just saving their precious dollars, or perhaps they didn't survive the treacherous seas from whence we've recently sailed.

I also noted a number of new companies in the exhibit hall. The best time to start a mortgage technology firm is at the bottom of a cycle. Most of the major software vendors were started during such times. I'm sure that some of these new firms will be very successful. If you can make a go of it in these market conditions, a lot of new revenue is easily found when things improve. Starting a firm at the bottom allows for significant profitability when the market takes off in the years that follow.

There were several venture-capital firms and other investors floating around the tech show. The one thing these guys know is that now is the best time to invest in the mortgage technology sector. Some of them have significant amounts of cash they are looking to place. One firm, Technology Crossover Ventures, New York, has an $8 billion portfolio and is specifically targeting financial technology that includes mortgage technology.

Still, rarely will these firms invest in a company with less than $20 million in revenues. The reality is there just aren't that many mortgage technology firms that are north of $20 million. Further, most of the firms in our industry have declining revenues because of our declining market. It's very difficult in general to attract investors or buyers when any firm shows declining revenues.

The fun surprise came just after the show, with the news of an initial public offering (IPO) filing by Ellie Mae Inc., Pleasanton, California. Ellie Mae hopes to raise $86 million and had sales in 2009 of $38 million. Sig Anderman, chief executive officer and president, has talked up Ellie Mae's IPO prospects for more than nine years, though I've been more skeptical. It's been difficult to do an IPO in the technology sector ever since the dot-com crash.

Ellie Mae's revenues are on the small side for an IPO, and they haven't escalated like one would normally expect for an IPO, in my view. On the other hand, I'm thrilled to see an exclusively mortgage technology firm go public. As the previous chief strategy officer for Ellie Mae, I'm excited to see that some of my past work made it possible for an IPO filing.

If the IPO is successful, it will create a very interesting opportunity for Ellie Mae. Being flush with cash during the bottom of the market cycle can be a very powerful and rare combination. Having a pile of cash for acquisition could allow Ellie Mae to really dominate the loan origination software business. …

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