Intercontinental Exchange has made significant progress in its long-term goal of transforming the US home loan market with its $12 billion acquisition of mortgage software specialist Black Knight. While this move is exciting for ICE, it has raised concerns among other players in the mortgage market about the control that ICE will wield over the technology that could potentially become the backbone of a $12 trillion industry.
The Federal Trade Commission recently dropped its opposition to the ICE-Black Knight deal on competition grounds, leading to the imminent final settlement. ICE, led by founder and CEO Jeffrey Sprecher, has expanded its business from commodity exchanges and clearing houses to encompass a wide range of data-centric operations, including bond prices and the New York Stock Exchange. The acquisition of Black Knight would be ICE’s largest purchase to date and would bring the company’s total investment in the mortgage industry to over $23 billion.
ICE’s interest in the mortgage industry stems from its desire to apply its expertise in automating markets to a complex and cumbersome process. Last year, over 4,000 lenders provided home loans in the US, with 60% of them coming from independent mortgage companies rather than banks. The loan application process involves multiple rounds of discussions and extensive documentation, resulting in a lengthy and arduous process. ICE sees an opportunity to streamline this process by digitizing it and aims to provide software that can underwrite a mortgage while the application is being filled out. Currently, even the most eligible applicants face a 60-day process. This potential for a more streamlined process has excited industry players, especially smaller lenders who lack the resources to develop their own technology.
After the settlement, ICE expects around 30% of its revenues to come from its mortgage tech unit, with a greater portion coming from recurring sources such as software leases. This would reduce the group’s exposure to the ups and downs of the housing market, particularly in a time when rising interest rates have dampened housing market activity. ICE’s mortgage tech segment reported an operating profit of $99 million in the second quarter, a 28% decrease compared to the previous year. In addition to streamlining the industry, ICE executives have also discussed the potential for tradeable products based on the company’s vast data trove.
However, there are reservations within the US mortgage industry regarding the deal. Small lenders are particularly concerned about ICE’s dominance and worry that switching technology providers would be challenging and costly. The Federal Trade Commission previously argued that the deal would increase costs for lenders and homebuyers. Members of the Community Home Lenders of America have reported pressure from ICE to purchase unwanted services in order to obtain desired ones. Black Knight is currently in arbitration with PennyMac, one of the largest standalone lenders, over alleged anti-competitive practices.
David Stevens, a former head of the Mortgage Bankers Association, expressed reservations about the deal, citing concerns about potential market implications. He believes that allowing a single company to become the largest entity in the mortgage technology space could crowd out newcomers and limit competition. Clifford Rossi, a financial risk specialist and professor at the University of Maryland, suggests that financial regulators may designate ICE as systemically important due to its extensive reach in the mortgage market. This would subject ICE to additional oversight to ensure the stability of the financial system.
Overall, while the ICE-Black Knight deal presents significant opportunities for innovation and streamlining in the mortgage industry, there are legitimate concerns about the potential consolidation of power and limited competition. The final settlement later this month will shed more light on the future direction of the industry.
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