It’s been a little over a month since an announcement from Blackstone (BX) and Stearns Lending shook up the mortgage lending world.
In August, Blackstone, a full-service, private-equity funded investment bank and burgeoning mortgage lending giant based in New York, announced that it was acquiring a majority stake in Stearns Holdings, the parent company of Stearns Lending.
Now, in an exclusive interview with HousingWire, the executives from Blackstone and Stearns Lending who guided this deal share how the deal came together and shed some light on what’s next for Stearns Lending now that it’s part of the Blackstone family.
For Brian Hale, Stearns Lending’s chief executive officer, the benefits of the Blackstone deal are so numerous, they challenge the rules of mathematics.
“What we see, from sitting in my chair, and I’m ecstatic about the announcement, is that we now have a partner that has exceptional access to the capital markets as a true partner in the business,” Hale told HousingWire.
“They bring immense expertise and financial acumen to the table for us,” Hale continued.
“Blackstone as a partner, and as a key stockholder, brings with it immense corporate finance expertise,” Hale said. “Their industry leading profile, along with Nadim and his team, blew us away with the depth of the homework they had done. They have exceptional knowledge of the industry. And we just believed that as partners it was a 1+1=28 kind of opportunity for both organizations.”
Hale refers to Blackstone Managing Director Nadim El Gabbani, who oversaw the deal from Blackstone’s side, and El Gabbani shares Hale’s optimism about the future.
“We feel this is a unique time in mortgage in so far as it’s a time where complexity is increasing; we believe we are positioned for a recovery in the purchase market; and the requirements for all the participants are going up,” El Gabbani said. “We see this as an opportunity to back a great competitor in the space and a great management team with Stearns.”
El Gabbani said that he and his team have been “excited and interested” in the mortgage sector for a number of years, and have known Glenn Stearns, the founder and chairman of Stearns Lending, since 2010.
Hale, who joined Stearns Lending three years ago, said that he met with the Blackstone shortly after becoming Stearns’ CEO, but said that timing wasn’t right for a deal at that point.
Hale said that the “immense” cost of compliance and dealing with regulators was part of the reason that Stearns felt that the time was right for a deal now.
Hale said that approximately 16 months ago, the company engaged JPMorgan on the investment banking side to assist the company in capturing and reviewing a number of opportunities for the company.
“There were a number of firms that either approached Glenn through the years or during my tenure and it frankly became a little unwieldy for us to talk to everybody. So we organized a formal process that narrowed it down fairly quickly,” Hale said.
“It was very clear through that process that Glenn, Katherine (Stearns Lending President Katherine Le), the Board of Directors and myself that the Blackstone team seemed to be the obvious choice,” Hale continued.
“To be blunt, we tried not play that card too early in the negotiations,” Hale said, with a laugh. “The opportunity was right and the timing was right, so here we are.”
Over the last few years, Hale has overseen an expansion of Stearns’ business as the company sought to ease the cost of compliance by diversifying its offerings.
In Hale’s words, Stearns has grown its servicing portfolio in excess of thirty-fold over the last three years.
“We diversified the company into four primary operating channels,” Hale said. “We’re the nation’s leading wholesaler. I think we may be the largest joint venture player in the space now. We have a growing and expanding traditional retail and consumer direct channel. And we have the correspondent channel, which is emerging as nearly a top ten player on that side.”
The goal, Hale said, was to adapt to the current business environment.
“We didn’t want to grow just for the sake of growth,” Hale said. “There’s no ego involved here. The cost of compliance, the cost of monitoring, the cost of dealing with our good friends, the 56 regulators that I have to respond to consistently, including the Consumer Financial Protection Bureau and all the states. There’s an immense cost to that.”
And to absorb those costs, Hale said that the company needed to expand.
“You have a choice in our business. You either invest appropriately, not just in systems, which are very capital intensive, but also in people, in talent, in key control areas of the company, which we’ve done,” Hale said. “And so the only way to make any sense out of that economically is to grow and spread your costs out over far more volume.”
Through investing in itself, Stearns has built a compliant organization, Hale said.
And according to El Gabbani, Stearns’ level of compliance was one of the main reasons why Stearns was a solid investment.
“We’ve spent a number of years looking at participants in the mortgage industry as well as in other areas of consumer finance, and I have to say, compliance is without question the most important issue that we look for,” El Gabbani said. “And we’ve seen more transactions not go through because of either a lack of focus on compliance or compliance issues. It’s something that is just a perennially difficult, complicated, and ever-changing issue that we see in all of the businesses that we invest in.”
El Gabbani said that it was clear in early discussions with Stearns that compliance was at the core of what Stearns does.
“From the first call, it was clear that the Stearns team focuses on compliance every single day,” El Gabbani said.
“They view it as something that is not optional. It’s not a burden that needs to be managed,” he continued. “It’s something that people need to do in order to be in the business. That philosophy is something that we feel is very important, because we are selecting partners for a multi-year period. We look at the world that way, and we know the Stearns team does too.
“We have not seen a business as well-run from a compliance standpoint as Stearns.”
Click below to read more about why Blackstone chose to invest in Stearns and where the two companies see the mortgage market moving in the future.