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mortgage industry acquisition

MCAP to Acquire Paradigm Quest and Merix

Canada is about to have a new #1 non-bank lender.

MCAP announced today that it’s buying Paradigm Quest (PQ), giving it PQ’s in-house brands, Merix Financial and Lendwise — and reportedly, origination contracts with dozens of other private label brands.

The move makes MCAP a juggernaut in the mortgage broker industry. Pending completion of the deal, MCAP will eclipse the former leading non-bank lender, First National. After the acquisition, MCAP’s mortgage assets under management will top $140 billion. First National is in the $118 billion range.

PQ gives MCAP about $30 billion in high-quality assets, renewal revenue, new broker relationships, new institutional funding relationships and potential access to more securitization. PQ’s business process outsourcing (e.g., contract underwriting) also provides MCAP additional revenue diversification.

From a mortgage metrics standpoint, the last S&P servicer report on PQ estimated its portfolio was 91% insured mortgages, with 0.30% 90-day arrears (as of Dec. 31, 2019).

And then there’s Merix, a pioneer in trailer fee broker compensation. Adding this third major broker-channel lender lets MCAP broaden its multi-brand strategy. Merix has had 17 years of building broker relationships.

“This is the best possible outcome for the future of the company because there is a real growth strategy for our brands,” said Paradigm Quest co-founder Kathy Gregory. “That alone will build a legacy for the employees and create unprecedented growth opportunities for our brands and customers.”

MCAP brings “capital and scale to invest in technology,” she adds, and technology spends have never been greater with lenders’ push towards automation.

The companies could provide only limited details due to the pending closing of the deal but here’s what seems apparent so far:

  • The transaction is expected to close this quarter.
  • We’re told that MERIX’s trailer fee compensation model will survive. Brokers are understandably worried about that, given brokers have lost trailer fees in the past at the likes of Street Capital, for example.
  • Few if any PQ/Merix jobs will be lost. Quite the opposite, MCAP says. It’s buying the business to grow it and it needs people.
  • Our understanding is that Merix CEO Boris Bozic will remain on for now.

Here’s what we don’t know:

  • How will Merix differentiate itself under the MCAP mothership?
  • How much did MCAP pay for PQ?
    • 9-figures is what we’d speculate.
  • What will become of PQ’s other founders after closing.
    • If our guess is correct, the deal will likely end an incredible 18-year run for Mortgage Hall of Famer Gregory, the only female CEO (let alone founder) of a sizable lender in Canada.

Paradigm Quest and Merix Financial started back in 2004 and 2005, respectively. In 2013, private equity firm Fortress Investment Group LLC bought a controlling interest in PQ. Eight years later, the founders have got their liquidity event.

Brokers on the popular industry forum ILMB were mostly supportive of the merger, although some expressed concern that consolidation isn’t good for the industry, noting that MCAP’s acquisition of RMG led to a convergence in pricing and policy between the two brands.

Any way you slice it, however, it’s a big win for MCAP — one that substantially scales the company’s revenue capabilities, virtually overnight.