Insights into american pacific mortgage’s quest for expansion

adminonJanuary 26, 2023February 19, 2023Leave a Comment

Mortgage rates are down, but don't be fooled – the industry's efforts to rid itself of a pandemic boom will continue through 2023. Up to 30% of the 1.000 largest independent mortgage lenders will also disappear by the end of this year through sales, mergers or failures with inflation still high and interest rates rising, according to forecasts by M&A advisory firm Sterling Point advisors.

But American Pacific Mortgage (APM), a California-based retail lender of about 3.600 employees and 1.500 mortgage loan originators, don't be deterred by the depressing outlook. Rather, APM sees this as an opportunity to expand geographically beyond its primary market of California into the Midwest and the Southeast.

In 2022 alone, APM acquired 11 branches from Arizona Sunstreet Loans and Sunstreet, 25 branches from Minnesota retail lender Intelligent Mortgage Lending and 51 branches from Amerifirst Financial Inc.

Lenders also picked up more than 45 former retail branches Finance of America Companies Inc. (FoA) months after it had closed its forward mortgage segment. However, Bill Lowman, CEO of APM, said the number of branches may have increased since the initial report because it includes secondary branches or additional licensed locations.

A total of 900 employees joined the company, out of the four deals APM closed last year, including 540 LOs, Lowman said in an interview with HousingWire.

However, this does not mean APM will make it through 2022 unscathed.

"We've had some layoffs throughout the year," Lowman said, without giving specific numbers.

The lender saw 2022 production decline by about 42% to $13.8 billion due to the interest rate environment and the elimination of the refi business, similar to any other lender, the executive said.

"I think the industry volume will end up going down by about 50. So in that regard, we feel like we've outperformed the market," Lowman said.

Asked how the company gets leads on potential deals, Lowman said it helps that other lenders know APM aggregates volume and is interested in acquisitions.

Get leads for potential deals

"They all come from different methods-whether they're presented to us by a consulting firm like Stratmor [Group]whether someone approaches us because they know us, or whether it's through industry contacts," Lowan noted.

However, not every deal proposal goes through.

APM forwarded about six to eight M&A proposals in 2022 that failed the initial review stage – which compares the origination volume the deal would bring to APM with the cost of onboarding a large number of employees.

The lender currently has strong roots in California, which accounted for about 45% of its total loan volume in 2022. The goal for 2023 is for that number to fall below 40% in California and instead expand to other regions of the country.

When branches are acquired, APM takes over LOs and processors to the extent that they could remain profitable.

"We do a pro forma analysis, we work with the store manager and say, 'Okay, you're doing well, come over' or 'You might have to reduce your staff a little bit because you're not profitable.' We want all our branches to be profitable," Lowman said.

After APM acquires the branches, it either takes over leasing the physical office space or finds smaller office space – which was the case with Finance of America and some Amerifirst Financial branches.

Sunstreet Mortgage branch managers and LOs were able to retain their existing 11 branches. APM also plans to acquire many of the retail leases, which span 24 stores, although this is still under negotiation.

Branding as American Pacific Mortgage

Acquired branches can continue to market themselves under their existing names, but become a division of APM. While Lend Smart, Sunstreet and AmeriFirst Financial continue to market themselves under existing names, former Finance of America branches now present themselves as APMs.

"They are part of our corporate policies, procedures and culture. We are an ESOP. Our company is 49% owned by its employees as an employee stock ownership plan, so they are a part of it. They are a part of everything American Pacific Mortgage is about," Lowman said.

Boosted by M&A activity that occurred in the second half of 2022, Lowman forecasts a 25% increase in volume for APM production in 2023 – at a time when procurement for the industry is expected to decline by about 10% to 15% from 2022.

The California lender is in talks with "a lot of lenders," Lowman said. He declined to provide further details.

"The greater the disruption, the greater the opportunity. If it's too hard for them, it's just right for us. We went into this declining market to take advantage of it," Lowman said.

So-called'Scope 3'-Emissionen, also Treibhausgase, die in der Zulieferkette eines Unternehmens oder beim Abnehmer eines Produkts entstehen, werden von Unternehmen kaum rapportiert. (Bild: Shutterstock.com/Nico Garstmann)

Companies are expanding their reporting on greenhouse gas emissions and adjusting production and work processes. However, the innovations are not enough to achieve the Paris climate goals. The experts of Swisscanto Invest see in the emissions metric "Scope 3" One major reason for this.

The "Scope 3" metric is designed to measure the greenhouse gas emissions of companies' supply chains and customers. Thus, Scope 3 can serve as one key lever among many to set new benchmarks in terms of the Paris climate goal. "A consistent implementation of Scope 3 with a detailed recording of greenhouse gases in supply chains is certainly associated with considerable effort. However, we strongly believe that as part of a move towards sustainable business models, resource conservation and circular economy, a process of 'Creative Destruction' as defined by the great economist Schumpeter can be or has already been set in motion", say Silke Humbert, Head Product Specialists and Gerhard Wagner, Head Sustainable Impact of Swisscanto Invest, the asset manager of Zurcher Kantonalbank.

Investigation of greenhouse gas emissions

A company's greenhouse gas emissions are divided into "Scope 1" and "Scope 3" emissions, "Scope 2" and "Scope 3":
Scope 1: Greenhouse gases generated directly in a company's production process.
Scope 2: Greenhouse gases generated in the context of purchased energy.
Scope 3: Greenhouse gases generated in a company's supply chain or at the customer's site through the use of the manufactured product.

Scope 1 and 2 are easy(er) to report on

According to the experts, the greenhouse gas emissions generated in the production process – i.e., Scope 1 and Scope 2 – can be relatively well controlled and reported by each company through the form of energy it purchases. Scope 3 emissions, on the other hand, are hardly ever reported. The reason for this is that the companies report that the upstream and downstream emissions are outside of their control, they have no data on this," emphasize the Swisscanto Invest experts. Furthermore, it is unclear how complex supply chains and the use by customers are to be treated. "There are therefore many obstacles to measuring Scope 3, although constructive proposals already exist, for example through the Greenhouse Gas Protocol, according to the Swisscanto Invest experts.

Scope 3 is relevant for the climate

In their opinion, a more consistent recording of Scope 3 emissions would be important simply because most greenhouse gas emissions occur in the Scope 3 category, as the following chart shows using the MSCI ACWI IMI index as an example. The MSCI All Country World Investable Market Index (ACWI IMI) provides access to equities from 23 industrialized and 27 emerging countries worldwide. The index comprises securities from the large caps, mid caps and small caps segments. It is clear that scope 3 emissions are almost three times higher than scope 1 and 2 combined. It can also be seen that Scope 3 is mainly used in the "downstream" area arises – i.e., the use of products by buyers/end users.

Intensity of greenhouse gas emissions (Scope 1 and 2 versus Scope 3)

Companies with more than 75% Scope 3 emissions

At Apple, for example, more than three quarters of the emissions occur in the Scope 3 category, namely in the manufacture of preliminary products in the supply chain. And in the case of energy companies such as Shell or BP, more than three quarters of the emissions also occur in the Scope 3 category – this time, however, not in the supply chain, but in the use of the raw material by the end consumer. "If companies design their in-house production processes with emissions from Scope 1 and 2 categories in such a way that they cause fewer emissions, that is all well and good. However, this is not enough to achieve the Paris climate target. The really relevant impact on the climate is caused by Scope 3 emissions", emphasize the Swisscanto Invest experts.

Efforts are already being made to record and reduce Scope 3 emissions, for example through the Greenhouse Gas Protocol. Companies such as Apple and Microsoft are also now focusing on issuance in supply chains. That there is much to be done in this regard is shown by the example of Apple, where only 1% of the CO2 footprint is accounted for by emissions in categories 1 and 2, and the rest by Scope 3 (supply chain 76%, end use 14%, transport 5%, other 5%), as shown in the Apple Environmental Responsibility Report 2019. If Apple seriously wants to do something for the climate, it must control its supply chain – and that is exactly what it intends to do.

Humbert and Wagner raise the question of whether corporate self-regulation is more likely or further legal regulation, and expect this to be one of the big topics at upcoming international climate conferences and WEF meetings.

Scope 3 is important for returns

Not only for the climate, but also for the return, Scope 3 plays an important role for companies, but also investors, the experts continue. That's because with current efforts by governments and businesses to meet the Paris climate goal and reduce greenhouse gas emissions, green technologies are becoming increasingly important and in demand.

For example, the stock prices of solar equipment manufacturers have recently soared. Solar power systems enable their users to generate energy without polluting emissions. This is why they have very low Scope 3 emissions. However, CO2 emissions are also generated during the production of solar plants; solar manufacturers therefore have higher Scope 1 and 2 emission values than financial companies, for example. "Thus, it is clear that investors who only consider those with currently low Scope 1 and Scope 2 data when selecting climate-friendly companies do not necessarily benefit from the pioneers of decarbonization", Humbert and Wagner note, adding, "We expect that the stocks of companies that are leading the way in decarbonization will be among the winners on the stock market.

However, because reliable scope 3 data are hardly available today, fundamental research and expertise are needed to assess the scope of new technologies and new policy frameworks. However, this knowledge will only be effective if as many companies as possible take up the challenge of providing transparent data on their scope 3 emissions.

Reduce scope 3 emissions

"Like other institutions, we believe that measuring Scope 3 emissions opens up a wide range of climate benefits, as well as economic benefits in the form of cost-cutting opportunities", Humbert and Wagner emphasize. Companies are finding entry points to do this within their own businesses, such as business travel and commuters, but especially by identifying opportunities for energy efficiency and cost reduction in their supply chain and in the use of their products.

"As part of Engagement, the direct dialog with companies, we place great emphasis on companies joining the Science Based Target Initiative to pursue a transparent climate strategy. Companies that follow a traceable decarbonization path and can document this path with forward-looking Scope 3 reporting not only contribute to climate improvements – they will also be among the winners on the stock market.", the Swisscanto Invest experts are convinced.

Market turmoil is likely to continue for the foreseeable future. (Image: Shutterstock.com/gopixa)

Economic outlook and thus market environment remain uncertain. Sebastien Galy of Nordea Asset Management ranks the economic outlook for different regions and explains the tactical and strategic opportunities investors can take advantage of.

Global economic growth is slowing. Markets have already priced in much of this slowdown, yet the economic outlook remains uncertain, with analyst estimates ranging from soft landings to recessions. For investors, however, this challenging environment also offers tactical and strategic opportunities, says Sebastien Galy, Senior Macro Strategist at Nordea Asset Management.

Central banks have responded to increased inflation by tightening monetary policy. Together with slower economic growth, this should have a lowering effect on inflation. Still, there are some supply-side factors that could keep inflation under pressure, Galy explains: "These include current supply chain bottlenecks, continued or renewed Covid-19 lockdowns, a slowdown in the housing market, and Russian retaliatory measures such as curtailed natural gas supplies, among others."

Disappointing corporate earnings expected in Europe

He said the European economy was suffering particularly badly under these conditions. However, the strategist expects at least energy prices to calm down to a certain extent. Although these could rise further against a backdrop of limited supply, they should stabilize back at lower levels as the economy limps along. This should also ease the pressure on supply chains and lead to relief at ports, for example.

"As a result, corporate earnings growth is likely to disappoint from a subdued level, while investors learn to be more patient and focus more and more on a moderate long-term growth path", says Galy.

In the USA, a whole range of economic scenarios is possible, the lack of historical examples and non-linearities make forecasting inflation and growth very difficult. On the one hand, household savings are falling, so they have to borrow more. On the other hand, once the Fed intervenes, inflation should ease, boosting both real incomes and consumer spending. Accordingly, a decent economic growth, a stagflation or even a recession is possible.

The economic trend in China is much clearer, he said. The zero-covid policy led to severe economic restrictions – but these should steadily decrease. The crisis in the real estate market, which is an enormously important pillar of the Chinese economy, is at least as important. If the real estate market falters even further, China is likely to face difficult times.

Focus on flexible solutions

What do these circumstances mean for investors? "Large technology companies tend to price in long-term economic growth and innovation that is currently being challenged", according to Galy. Still, there are opportunities in this area. Chinese companies are particularly interesting in the context of climate change, as they produce the majority of green tech solutions. In addition, select tech and disruption stocks should benefit as fears of a rapid global economic slowdown subside.

Value investments in combination with quality such as Coca-Cola and Air Liquide are currently less volatile, he said. But above all, Galy advises diversified flexible solutions: "Listed infrastructure and real estate should continue to help hedge against inflation," he says. The same applies to the defensive characteristics and alpha capabilities of covered bond strategies. Such a complex environment is also a reminder of the long-term value of ESG."

Get leads for potential deals

Branding as American Pacific Mortgage

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