Mortgage Lenders Look to Public Filing and SPACs

The mortgage industry was exceptionally lucrative in 2020 due to a surge in refinance loans triggered by historically low interest rates. Loan refinancing comprised over 50 percent of loan originations in 2020. According to data provider Black Knight, the mortgage industry originated more than $4.4 trillion in loans in 2020, about $300 billion more than predicted by industry analysts. This is a 45 percent increase from 2019, according to the Mortgage Bankers Association.

With this housing resurgence, many mortgage banks saw profit margins at record highs. Last fall, numerous mortgage lenders began considering initial public offering (IPO) filings to fund growth and raise equity, with many lenders beginning the process of regulatory filing with the Security and Exchange Commission (SEC). Rocket Mortgage, formally Quicken Loans, one of the nation’s largest mortgage companies, expressed its decision to go public as a way to reward employees with stock options among other benefits.

Access to More Capital

Home Point Capital and loanDepot are two of the most recent mortgage companies to file registration statements with the SEC in January 2021. Public stock offerings are one way for mortgage banks to solve the continual problem of raising capital, with loanDepot looking to raise over $300 million in equity. Mortgage banks are unlike traditional banks that have the advantage of relying on customer deposits to fund their loans. The anticipated extra capital injected into the mortgage banking industry through IPOs is projected to make for an even better year with more than $4.5 trillion projected originations in 2021.

One primary benefit of raising equity capital through an IPO is that it removes the obligation for repayment, unlike debt capital that would also sustain an annual interest rate. Instead, the shareholders’ investments are recompensed based on the stock’s performance in the market. The drawback to equity capital is that having shareholders dilutes ownership of the company and requires significantly more governance and rules.

Special Purpose Acquisition Companies

Many lenders are looking at utilizing a hot trend registration vehicle: a special purpose acquisition company (SPAC). A SPAC has no commercial operations and is structured strictly to raise funds through an IPO to purchase another company. One can look at a SPAC as the reverse of a traditional IPO. A SPAC goes public first – usually with a highly regarded executive team able to raise money from large institutional investors – with the intent to acquire a private company to put in its shell within about 24 months.  Essentially, a SPAC would acquire an existing mortgage bank following its fundraising IPO.

Unlike most other non-performing shell corporations, SPACs typically have cash. In most cases, the cash in a typical SPAC will not be less than $5 million, but the money is helpful to create immediate capital appreciation and value for the target in the transaction.

Financial Statement Reporting Considerations

As part of the public filing process, management will need to have its financial statements audited under Public Company Accounting Oversight Board auditing standards. In addition, SEC independence rules are much more restrictive than the American Institute of Certified Public Accountants with respect to the auditors providing bookkeeping, financial statement preparation, and tax preparation for officers of the company. These are issues that should be discussed with the auditors as part of the public offering process.

Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.