Case study on mortgage banking with solution

Case 1 Capital Mortgage Insurance Corporation (A) Frank Randall hung up the telephone, leaned across his desk, and fixed a cold stare at Jim Dolan. OK, Jim. They've agreed to a meeting. We've got three days to resolve this thing. The question is, what approach should we take? How do we get them to accept our offer? Randall, president of Capital Mortgage Insurance Corporation (CMI), had called Dolan, his senior vice president and treasurer, into his office to help him plan their strategy for completing the acquisition of Corporate Transfer Services (CTS). The two men had begun informal discussions with the principal stockholders of the small employee relocation services company some four months earlier. Now, in late May 1979, they were developing the terms of a formal purchase offer and plotting their strategy for the final negotiations. The acquisition, if consummated, would be the first in CMI's history. Furthermore, it represented a significant departure from the company's present business. Randall and Dolan knew that the acquisition could have major implications, both for themselves and for the company they had revitalized over the past several years. Jim Dolan ignored Frank Randall's intense look and gazed out the eighth-floor window overlooking Philadelphia's Independence Square. That's not an easy question, Frank. We know they're still looking for a lot more money than we're thinking about. But beyond that, the four partners have their own differences, and we need to think through just what they're expecting. So I guess we'd better talk this one through pretty carefully. Company and Industry Background CMI was a wholly owned subsidiary of Northwest Equipment Corporation, a major freight transporter and lessor of railcars, commercial aircraft, and other industrial equipment. Northwest had acquired CMI in 1978, two years after CMI's original parent company, an investment management corporation, had gone into Chapter 11 bankruptcy proceedings. CMI had been created to sell mortgage guaranty insurance policies to residential mortgage lenders throughout the United States. Mortgage insurance provides banks, savings and loans, mortgage bankers, and other mortgage lenders with protection against financial losses when homeowners default on their mortgage loans. Lending institutions normally protect their property loan investments by offering loans of only 70 percent to 80 percent of the appraised value of the property; the Page 568remaining 20 to 30 percent constitutes the homeowner's down payment. However, mortgage loan insurance makes it possible for lenders to offer so-called high-ratio loans of up to 95 percent of a home's appraised value. High-ratio loans are permitted only when the lender insures the loan; although the policy protects the lender, the premiums are paid by the borrower, as an addition to monthly principal and interest charges. The principal attraction of mortgage insurance is that it makes purchasing a home possible for many more individuals. It is much easier to produce a 5 percent down payment than to save up the 20 to 30 percent traditionally required. CMI had a mixed record of success within the private mortgage insurance industry. Frank Randall, the company's first and only president, had gotten the organization off to an aggressive beginning, attaining a 14.8 percent market share by 1972.