Countrywide Buying KB Unit; Firms to Form Loan Venture
KB Home said Thursday it would sell its home-loan business to mortgage giant Countrywide Financial Corp. and would take a 50% stake in the new venture.
Financial terms weren’t disclosed.
The move, to an extent, ends an era for the Westwood-based builder, which 40 years ago pioneered the housing industry’s version of one-stop shopping by making mortgages available to its home-buying customers.
Today, most major U.S. home builders have followed KB Home’s lead with their own mortgage arms. But despite its status as an industry innovator, KB Home never made much money selling mortgages compared with many of its peers, and it has been reluctant to offer the riskier “interest-only” loans that are in big demand from borrowers.
In 2004, its KB Home Mortgage unit contributed 1.2% to pretax profit of $718 million.
The company still intends to offer customers the convenience of shopping for a mortgage while they are shopping for a house. KB Home and Countrywide will share revenue in a joint venture that gives the Calabasas-based lender exclusive access to KB Home customers through representatives who will be on site pitching mortgages at KB Home’s new-home communities.
KB Home customers, however, will still have the option of shopping elsewhere for a mortgage.
“It’s a pretty good move on KB’s part,” said Greg Gieber, an analyst who covers the company for A.G. Edwards & Sons. “This gives them a little cash, and they don’t have to worry about the execution but get all the benefits of having an in-house mortgage operation.”
KB Home Chief Executive Bruce Karatz acknowledged that KB Home was not willing to invest in its mortgage business to the extent necessary to compete with lenders such as Countrywide and was losing potential borrowers as a result. Its mortgage retention rate in the fourth quarter was 55%, down from 80% in recent years.
“We made our choices as to what we thought was an adequate number of mortgage products that we would offer,” Karatz said. “For most buyers that worked, but the problem is that customers are getting more sophisticated. We could never train our people as well as Countrywide does.”
As the nation’s No. 1 mortgage lender and servicer, Countrywide sells more than 180 mortgage products and has been a leader in automating the lending process. Last year its loan production totaled $363 billion. In contrast, KB Home’s volume was $3 billion in 2004.
The venture lets KB Home “offer the widest range of mortgages at the most competitive prices and in the most efficient manner,” Karatz said.
For Countrywide, the deal puts it a tad closer to its goal of doubling its share of the mortgage market to 30% by the end of the decade. KB Home, the nation’s fifth-largest builder by revenue and number of homes, is on track this year to deliver 40,000 homes in 13 states and in France, where it is the largest builder.
The transaction “gives us a point of contact and preference in the process, and that is clearly valuable for us and for KB,” said Countrywide President Stanford Kurland.
Countrywide stock rose 20 cents, or 0.5%, to $38.61 on Thursday, and KB Home shares added $1.14, or 1.5%, to close at $76.23. The deal is expected to add at least 30 cents a share to KB Home’s earnings in fiscal 2006 but would not affect its forecasts for 2005. Before the announcement of the transaction, analysts expected KB Home to earn $9.13 a share in 2005 and $10.86 a share in 2006, according to Reuters estimates.
Though he considered the deal “small” for Countrywide, Michael McMahon, an analyst at Sandler O’Neill & Partners, said the venture represented another step toward consolidation in the highly fragmented mortgage finance industry, in which the top five companies control more than 50% of the business.
“As the mortgage business continues to get more challenging, it’s probably better for KB to outsource their mortgage operations into a strategic alliance,” said McMahon, who covers Countrywide. “I’m sure that other builders are wondering if they should be doing this as well.”
