Some residential lenders believe that servicing, and the mortgage servicing rights that accompany it, is the only thing of value for lenders. After all, it is an annuity that earns a return every month or can be sold. But that begs the questions, is it only the lenders who have servicing who have any value? Can small lenders with decent market share have interest from buyers? And what attributes are examined when a potential buyer and seller of a lender are negotiating?
The actual valuation analysis of a lender, or vendor, can be compared to that of appraising a house. The “Market Approach” is based on market multiples derived from publicly traded companies or actual sales of comparable companies or assets. The “Cost Approach” is based on the value of the underlying assets and liabilities of a business to estimate the equity value of the firm. (This approach, however, is not applicable to a mortgage production company without significant servicing assets). The “Income Approach” is based on the premise that the value of a business depends on its future earnings, discounted at a reasonable discount rate, that is commensurate with the time value of money and the inherent risk of the investment.