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EXCLUSIVE: How the Blackstone-Stearns Lending deal came together and what’s next

Details on industry-shifting deal

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.

In El Gabbani’s mind, an operation like the one Stearns has built is the way to succeed in the mortgage space.

“We think creating a multi-channel originator, as Stearns has done, is absolutely the right strategy,” El Gabbani said. “It gives the company flexibility and durability across cycles and across years. And that’s something that’s important to us. The future in mortgage is always uncertain on a year-to-year basis. We feel we’re entering the field with the right team, and we look forward to competing.”

For Stearns, the injection of capital from Blackstone is critical to the future of the company, especially given the rapidly shifting foundation of the industry.

“Capital is king in this business as is thinking about how you finance your business on a go-forward basis. It’s expensive to be in the mortgage business. It requires immense capital. It requires immense talent and systems and controls,” Hale said.

“We don’t know what the next three to five years is going to hold, but I’m fairly confident that we’re going to see tectonic change,” he continued.

“This is something I share with our senior team in every meeting we have,” Hale said. “I tell them nothing we talk about today is going to be about our life getting easier. I’ve just given up, frankly, on the promise that things will ever get dramatically easier.”

Hale predicts that the next few years will see even more change that the industry has seen in the last few, making the Blackstone relationship all the more valuable for Stearns.

“I think the change we will see in the next five or six or seven years will make the last five or six or seven years look like a walk in the park,” Hale said.

“I think that makes most people’s heads hurt when you say that. But I just look back over seven or eight years, and the change we’ve seen has been like when the dinosaurs went away,” he continued.

“This is tectonic change in our industry at levels not seen in maybe the last 30 years,” Hale added. “So we now feel like we’re stronger and better prepared to deal with all those things and take advantage of whatever change shows up. The next TRID will be coming in the next few years.”

Both parties view this relationship as one that will last more than a few years.

“We view this as a long-term partnership with Stearns. Every deal is different. Try as we may, we can’t predict the exact timeline for every transaction, but we typically hold our companies for three to seven years,” El Gabbani said.

“We think that’s important, especially for a company like Stearns, which is growing and expanding and invested in the future,” he continued.

“We want to be able to allow management to make investments in the future, which sometimes take years to pay off and not worry about quarterly volatility and what the market thinks about things,” El Gabbani said.

“At the right time, we will return capital to our investors and look to monetize our investment in some way or another, but that’s years in the future,” he said. “We’re much more focused now on what we can do and how we can support the company.”

And neither party is thinking about when and how Blackstone’s involvement may or may not end.

“Our role here is to support the management and help the company,” El Gabbani said. “We will be active and engaged board members. We plan to work with Brian and help him accomplish the goals and execute the strategies that he’s laid out. And we think those are absolutely the right way to approach the market.”

Hale said they haven’t had “more than five or ten minutes” of conversation about what the end of this deal may look like for Stearns.

“Is it IPO? Is it staying private? Is it some other kind of exit for the organization?,” Hale said. “What we’ve really been focused on is how we grow this business, how we optimize shareholder value without regard to who the shareholders are, how we put this business on a very permanent footing.”

El Gabbani said that Blackstone isn’t coming in to be the management of the company. “That’s not what we do,” he said. “But we are going to support them in every way we can.”

For Blackstone, El Gabbani said that the opportunity to get into the mortgage space was an attractive one, and one shared by some of his colleagues with Blackstone.

Earlier in August, Finance of America Holdings, a Blackstone portfolio company, said that it purchased several major lenders, a move that could make it one of the nation’s largest nonbank originators.

But El Gabbani noted that Finance of America is managed by a different fund within Blackstone with different investors, managed by different investment professionals.

“The businesses are going to operate separately,” El Gabbani said. “I think collectively, they’re under 2.5% of the mortgage market. We just think it’s a huge opportunity and there’s certainly room for more than one company.”

El Gabbani said his team sees the strength of the opportunity throughout the mortgage industry.

“Times of change like this create opportunities for companies, especially for ones that are well managed to keep up with the change and I would imagine that our colleagues think about the world in the same way,” he said.

“It probably is a testament to how attractive the market is,” El Gabbani continued. “It’s very large market with a lot of change and that creates opportunity.”

For Hale and the Stearns team, it’s full steam ahead without much change at all, with Glenn Stearns retaining a “significant” ownership stake in the company he founded.

“We used to have two stockholders and now we have three stockholders, with one that brings immense expertise and access to capital,” Hale said.

“We think of it as continuing forward with the strategies that we have set forth,” Hale said. “You have to build a company that has the competencies of change management because you can’t predict the future. So can you build a company and a team and an approach that says whatever comes, we have the core competencies to deal with those changes and the courage to step up and deal with them as opposed to just praying that the old days will come back? Because I don’t think the old days are ever coming back. I hope they don’t.”

3d rendering of a row of luxury townhouses along a street

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