It’s no coincidence that the post-2008 crisis mortgage expansion happened to occur during a period marked by transformative technological change in the industry. However, a double whammy of building economic headwinds and a proposed merger between ICE Mortgage Technology and Black Knight threatens to upend much of the benefit from robust competition that fostered considerable innovation in mortgage technology over the last decade.
Most people outside of the mortgage industry are not even aware that one of the largest mergers between mortgage technology firms is on the verge of taking place. While mergers such as this tout the benefits of various synergies and scale economies that can accrue over time, in this case the $13 billion combination of two of the largest mortgage technology firms is more likely to bring anticompetitive effects by choking off smaller tech firms from mortgage originators and servicers.
Behind the record setting mortgage origination volume of $4.4 trillion in 2021 and the 12.3 million first-lien residential loans serviced last year is a complex network of origination, servicing, pricing and product systems that have brought the mortgage industry into the 21st century.
While the mortgage business has been profitable of late, the financial fortunes of originators large and small are tied to the inherent cyclicality of the mortgage market leading to natural episodic expansions and contractions. The industry is now heading into one of those contractionary periods and an ICE-Black Knight merger would amplify those effects.
Mortgage origination and servicing is an economy of scale business. In Economics 101, we know that companies with lower average costs of production can enjoy a competitive advantage over their higher cost counterparts.
With the average cost to originate a mortgage an eye-popping $10,637 per loan, leveraging technology across the loan manufacturing process is critical to the long-term viability of originators and servicers.
The market presence of the proposed ICE-Black Knight merger threatens to destabilize the mortgage industry in several ways. First, as most anticompetitive mergers go, smaller mortgage tech firms would be squeezed out, much in the same manner we hear about with Amazon, Google and other massively disruptive technology forces in those markets.
Together, ICE and Black Knight would dominate the technology platforms used to source, price, underwrite and service all mortgages in the country.
With less competition among technology providers, originators and servicers would find themselves at the mercy of this mortgage technology behemoth. Costs associated with mortgage technology services would rise in the face of one dominant service provider, particularly if the seller of those services is able to bifurcate the market between buyers in a manner that differentiates pricing between buyers. This could force a wedge particularly between large and small originators that reduces competition in the mortgage market.
Why should we care what happens in some arcane market that hardly anyone outside the mortgage industry really knows much about? Higher costs of origination and servicing ultimately will be passed through to some degree to borrowers.
In a world where housing affordability was already out of reach in many markets for a large number of potential homebuyers, compounding the highest mortgage rates since the 2008 mortgage crisis with higher origination and servicing costs will hurt borrowers and further exacerbate a housing downturn.
The FTC needs to carefully assess the deleterious effects of an ICE-Black Knight merger before rendering a decision. The stakes are far too great for the industry at-large and individual borrowers who have certainly reaped the benefit of the mortgage technology renaissance that has blossomed over the last decade.
Clifford Rossi is Professor-of-the Practice and Executive-in-Residence at the Robert H. Smith School of Business at the University of Maryland. He has 23 years of industry experience having held several C-level executive risk management roles at some of the largest financial institutions.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the author of this story:
Clifford Rossi at crossi@umd.edu
To contact the editor responsible for this story:
Sarah Wheeler at swheeler@housingwire.com
