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.”