ICE’s $12bn mortgage tech deal builds heft in US home loans

Intercontinental Exchange got a step closer to realising seven-year-old dreams of transforming the US home loan market this week, after a US regulator dropped opposition to its $12bn takeover of mortgage software specialist Black Knight.

For others in the mortgage market, however, the move has failed to allay anxieties about the control ICE will have over technology that could become the backbone of a fragmented $12tn industry. 

Last Monday, the Federal Trade Commission agreed to end a court case aiming to halt the ICE-Black Knight deal on competition grounds. The move followed two planned divestitures of Black Knight units. A final settlement is due later this month.

Under founder and chief executive Jeffrey Sprecher, Atlanta-based ICE has grown from operating commodity exchanges and clearing houses to becoming a vast data-centric business that ranges from bond prices to running the New York Stock Exchange — and now the mortgage industry.

ICE obtained control of mortgage data repository MERS in 2016 and bought loan origination platform Ellie Mae for $11bn in 2020. The deal for Black Knight would mark its largest-ever purchase and bring cumulative investment in the mortgage industry to more than $23bn. 

The attraction for ICE is the chance to apply its experience automating markets to a notoriously complex process.

More than 4,000 lenders provided home loans in the US last year, 60 per cent of which were made by independent mortgage companies, not banks.

Applying for a loan is cumbersome, involving several rounds of discussions over paper documentation such as tax returns and credit scores — all as the lender’s own borrowing costs shift along with interest rates, which have more than doubled in the past two years.

After a deal is completed, loan payments need to be monitored, while regulations stipulate documents must be stored for several years.

“There’s only a single-digit percentage of mortgages today in this country that have gone through a digital note process. That’s the opportunity,” Sprecher told an industry conference two months ago. “Our goal is to be able to provide software that can underwrite a mortgage while you’re filling out the application. Right now, it’s about a 60-day process even for the most eligible and capable.”

The potential for a streamlined process has excited many in the industry, particularly smaller players who do not have the means to develop their own technology, while high interest rates have weighed heavily on the demand for new home loans.

Black Knight’s remaining units, after the divestitures, include market data as well as products that help with post-deal administration of loans.

“They’re definitely going to be a major player,” said Patrick Moley, analyst at Piper Sandler. “When you combine ICE’s expertise in electronification of fixed income and capital markets, and an outdated mortgage industry, it is a good business over the long term if they can succeed in reducing some frictions in the industry.”

ICE estimates about 30 per cent of its revenues will flow from its mortgage tech unit after the Black Knight deal, with a bigger share of those coming from recurring sources such as software leases.

This would leave the group less exposed to housing market ups and downs, especially at a time when climbing interest rates have weakened housing market activity. Operating profit in ICE’s mortgage tech segment was $99mn in the second quarter, down by 28 per cent from a year before.

Beyond the potential to streamline the industry, ICE executives have also discussed building tradeable products based on the company’s new data trove. 

Last year ICE launched mortgage futures based on its own index tracking mortgage rates, as an interest rate-hedging tool

“What ICE is really good at is monetising data, and this gives them even more data to monetise,” said Andrew Bond, senior equity research analyst at Rosenblatt Securities. 

Yet the deal faces strong reservations in the US mortgage industry, where small lenders are particularly worried ICE’s dominance will make it hard to switch technology providers and could add to their costs. When the FTC sued to block the deal in March, it said it would drive up costs to lenders and homebuyers.

“Our members feel very vulnerable because these services are so integral to their operations and the transition is so difficult and problematic,” said Scott Olson, executive director of the Community Home Lenders of America, whose members have reported bundling pressure from ICE, where they are pushed to buy services they do not want in order to get the ones they do.

ICE did not respond to a request for comment on this point.

Black Knight is in arbitration with PennyMac, one of the largest standalone lenders, over what it felt were anti-competitive practices designed to maintain Black Knight’s market-leading position.

David Stevens, a former head of the Mortgage Bankers Association and a Federal Housing Administration commissioner in the Obama administration, worked directly with ICE officials as a board member of MERS when the exchange group took control. He also expressed reservations about the Black Knight deal.

“I’m a big fan of ICE. They’re really smart people but this is related to fundamental [market] implications,” he said. “Here we have a very sophisticated, very competitive company being given the opportunity to become the largest monoline entity in the mortgage technology space, which could theoretically begin to crowd out newcomers.”

Financial risk specialist Clifford Rossi, a veteran of several large lenders and professor at the University of Maryland, suggested financial regulators could make a strong case for designating ICE as systemically important because of its expansive mortgage market reach — a label that involves additional oversight. 

“By concentrating the technology solution in the hands of, say, one or two providers, it puts more pressure on the [system] plumbing,” he said, adding: “If there is a hiccup in the origination or in the servicing process, that can have pretty significant adverse impacts on not just the companies, but also on the customers downstream.”