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The Institutional Risk Analyst

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Ginnie Mae - Credit Suisse = ? A Biden MSR Tax? Does BKI + ICE = < 2?

February 13, 2023 | Premium Service | The continuing battle in Washington over the proposed acquisition of conventional servicing software monopoly Black Knight (BKI) (k/n/a Loan Processing Services) by Wall Street data monopoly Intercontinental Exchange (ICE) seems to be drawing growing scrutiny. Just imagine putting two legacy technology monopolies, one in housing finance and the other in global markets, in a single value-killing burrito!

Politico reports that Federal Financial Analytics managing partner Karen Petrou, one of the most respected banking consultants in Washington, has a new paper urging the Federal Trade Commission to block Intercontinental Exchange’s acquisition of Black Knight, citing potential systemic risks. We worry more about the 50-year old technology.

FedFin disclosed that the paper was funded by an unnamed entity “for which this transaction has raised competition concerns” but said it retained full editorial control over the work. Karen’s book on the Fed is an important read BTW.

ICE has said the deal would lower costs for lenders and improve the homebuyer’s experience. If you believe that, then we have a couple of bridges to the multiverse decorated with hot new NFTs we’d like to sell you. A BKI spokesperson said the new FedFin paper was inaccurate, adding that it was funded by competitors. That sounds an awful lot like Warburg Pincus portfolio company Sagent Lending Technologies.

We published a discussion of the ICE+BKI transaction with former FHA Commissioner and Mortgage Bankers Association head David Stevens (“David Stevens on GNMA Capital Rule & ICE + BKI”). Our view is that the BKI purchase is a horrible deal for ICE shareholders, a value killer of epic proportions for one of the most highly valued utility stocks on Wall Street. BKI trades on a 9 price-to-earnings ratio. ICE trade over 40 P/E today. Any questions? Next!

The concerns raised by Stevens and others about operational risk was just illustrated by the market outage at the New York Stock Exchange, a unit of ICE. But ICE has been reportedly lobbying regulators by saying that they will improve the consumer experience in mortgage lending. Again, looking at the goals for cost-savings and earnings post-close in ICE's public disclosure, we cannot see how there will be any money -- or people -- left to drive change in BKI's antiquated platform.

“Black Knight is reportedly placing the Empower loan origination system up for sale in order to gain antitrust approval for its acquisition by Intercontinental Exchange,” reports National Mortgage News. “From the day the deal was signed, most expected that Black Knight would have to divest the LOS, the No. 2 most used system behind acquirer ICE Mortgage Technology's Encompass.”

In our latest column in NMN, we note that it is financial instability in depositories and not systemic risk from nonbanks that poses the biggest the biggest threat to the housing finance sector. The fact that the Financial Stability Oversight Counsel (FSOC) frets about nonbank risk, but ignores the growing insolvency of the banking system due to QT, is a national scandal.

Speaking of key bank mortgage lenders servicing the government market, on Friday Credit Suisse (CS) finally closed "part" of the sale of its Structured Products Group (SPG) to Apollo Global Management (APO). While the media is focused on the larger restructuring of CS into a gentle asset gatherer, the disposition of the US mortgage business will determine whether the process succeeds or fails.

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