The investment community is still trying to unpack what Intercontinental Exchange (ICE) has in mind with the potential acquisition of Black Knight. Mortgage analysts expect to see consolidation if the deal were to go through, but also forecast that strong players in the servicing and loan origination system side will emerge. This, in turn, would provide more options for lenders.
“The core of what they (ICE) are acquiring with Black Knight is the MSP – the mortgage servicing platform. It is a key missing piece of ICE’s tech stack,” Ryan Tomasello, managing director of Keefe, Bruyette & Woods, said during a session at the Mortgage Bankers Association Technology Solutions Conference & Expo on Tuesday.
The servicing aspect of the loan is a heavily under-invested and under-monetized area of a loan lifecycle that is perhaps the most important factor in terms of servicing, Tomasello explained.
In mid-2022, the ICE-Black Knight deal prompted concerns that it would raise costs for consumers and give ICE too much pricing power in the mortgage data market, which lenders rely on. The Community of Home Lenders Association (CHLA) claimed that Empower and ICE’s Encompass jointly control upward of 60% of the loan origination software system.
In the latest development, the U.S. Federal Trade Commission sued ICE to block the deal last month. The FTC said in the lawsuit that the merger would push customers to use its mortgage services and products and claimed the deal would stifle innovation while limiting lenders’ choices for origination and mortgage servicing.
Prior to the FTC’s suit, Black Knight announced the sale of its Empower business to a subsidiary of Canada’s Constellation Software Inc., which was done in an effort to overcome antitrust concerns. ICE and Black Knight also amended their deal terms to reduce the valuation of Black Knight to $11.8 billion last month, about 11% lower than the valuation when the agreement was announced last year.
Tech vendors and competitors in the space are waiting to see what the outcome of the deal would be and how the divestiture of Black Knight’s Empower could impact the creation of another loan origination system in the industry.
Multi-faceted tech platforms and scaling will be key for players to compete with the tech giant, should the deal go through, Tomasello said.
At the same time, the potential merger of two big tech giants accelerated optionality that lenders and servicers were not thinking of before the announcement of the deal, Micah Jindal, managing director and senior partner at Boston Consulting Group, explained.
“It’s amazing if you look at five years ago versus now, how many new loan origination systems there are, how many new servicing platforms there are… I think there are a lot of interesting strong players who are trying to be in that second and third position if the deal does go through,” Jindal said.
The production side of tech innovation
While tech innovation has benefited consumers’ mortgage experiences, more work needs to be done in the production side — particularly in driving down costs to produce a loan.
“We’ve gone through a decade where a lot of tech has been incorporated into the mortgage process, but we haven’t necessarily seen the benefits when it comes to cost and cycle times (…). We’ll say we have on the experience side of things, but it brings to light how much more that there is to technology,” Jindal said.
In the fourth quarter of 2022, the cost of originating a loan hit a record $12,450, according to the MBA’s recent survey. The average loan production expense was $7,068 per loan from the third quarter of 2008 to the last quarter of 2022.
Bose George, managing director at Keefe, Bruyette & Woods, noted efforts from lenders, such as Rocket Companies, that target the purchase market through different products.
“What Rocket is doing through Rocket Money and the recently introduced credit card (…). All of those things could improve their ability to attract purchase customers at a lower cost than typical because the big cost to originate comes from the acquisition of customers (…). Some of these investments could pay off over time,” George said.
Rocket Money, which allows clients to find subscriptions, manage bills and cancel recurring charges, and Rocket Companies’ credit card, which launched late last month, are geared toward courting potential homebuyers.
But in an industry that is highly regulated, it will be the regulators that will play a key role in driving innovation.
“We’re seeing progress being made there with the Federal Housing Finance Agency (FHFA) soliciting feedback on technologies they should be focused on (…). Everyone needs to be all in on whatever areas that the industry is going to be driving innovation and bringing down costs,” Tomasello said.