The Great Wave of Mortgage Bank Consolidation Is Underway
Up to 30% of the 1,000 largest independent mortgage banks are expected to disappear by the end of 2023 via sales, mergers or bankruptcies following the double whammy of inflation and still-rocking interest rates. rise.
This is the projection offered by Brett Ludden, general manager of Sterling Point Advisorsa Virginia-based mergers and acquisitions (M&A) advisory firm.
“We have a number of buy-side and sell-side clients and an even larger stable of industry owners and CEOs that we speak to on a regular basis,” Ludden said. “The outlook is not good for the industry’s large cohorts.”
This is especially true for Independent Mortgage Banks (IMBs) which have been overly dependent in recent years on refinancing production. The Mortgage Bankers Association (MBA) project refinance volume will be down 24% next year, compared to 2022, to $513 billion – and that’s after falling $2.6 trillion in 2021.
Sterling’s outlook for industry consolidation is even more dire than a recent projection offered by Tom Capasse, managing partner and co-founder of the New York firm. Cascading asset management, a global alternative investment manager with some $11 billion in assets under management. Capasse, working from a much broader base of IMBs, including many other smaller lenders beyond the larger 1,000, predicts that approximately 20% of the IMB segment will disappear via sales, mergers or bankruptcies within the next 18 months to two years.
“Lenders who turn their full attention to refinancing when that activity skyrockets are reaping huge profits,” said Garth Graham, senior partner and head of M&A activity for the Stratmor Group, a Colorado-based mortgage advisory firm. “But the tide always turns eventually, and when it does, many of these lenders struggle to stay afloat.
“We’re seeing a lot of that this year, and it’s definitely going to continue into 2023. … Purchase loans are just harder to market and convert, harder to process, and they drive lower revenue and higher expenses. .”
Stratmor predicts that by the end of the year, nearly 50 M&A transactions involving IMBs will have been announced or closed. That’s a 50% increase from 2018, “the next highest year of lender consolidations in three decades,” according to a recent report. Stratmor Report States.
Is it time to eat the minnows?
Consolidation fervor is fueled by several factors, according to David Hrobon, principal at Stratmor. These include the following: IMB performance this year, on average, it is almost the break-even point; origination volume is expected to fall 50% this year from 2021 levels and even more next year; and “net production income is trending towards its lowest point since 2018”.
“It’s taken us a number of years to get to this point, fueled largely by the Federal Reserve’s policy of keeping federal funds rates at or near zero,” said Bill Shirreffs, senior director and head of MSR services and sales operations in California. Mortgage capital negotiation (MCT). “Current market conditions have also been affected by the fact that the Treasury has been actively buying MBS [mortgage-backed securities] to maintain the stability of capital markets.
“Both of these actions have created artificial demand which, when removed, results in dramatic market corrections. This is what we are experiencing right now, a market correction, and therefore it could take years for things to normalize.
To better illustrate what’s happening in the mortgage industry, Sterling’s Ludden has provided mortgage origination estimates for the top 1,000 IMBs, broken down by production tranches.
For calendar year 2021, Sterling estimates that 38% of the top 1,000 IMBs, or about 380, had mortgage production of $250 million or less. For that same group of 1,000 IMBs, in the 12 months ending June 30, 2023, about 54%, or about 540, are expected to have mortgage production of $250 million or less.
“For small lenders that were making $125 million up to $250 million in 2021 [a 14% slice, or some 140 IMBs]72% [about 100] will make less than $125 million over the next 12 months [ending June 30, 2023]Ludden said as he further broke down the production change. “They just won’t have enough scale to be able to break even, and there’s not enough cost to cut and, most importantly, these small businesses don’t have the cash and equity of large companies.”
The same downward shift in production applies to the top of the loan production scale.
For the whole of last year, 33% (about 330) of the top 1,000 IMBs had loan production of $1 billion or more – with 20% (about 200 of 330) seeing $2 billion in loan production. mortgages or more, according to Ludden. For the 12 months to June 2023, only 18% of the largest IMBs (or around 180) are expected to have production of $1 billion or more – with 10% of them (or around 100 out of 180) at 2 billions of dollars in loan production or greater.
“Of the [13%, or roughly 130] companies that made $1 billion to $2 billion for production in 2021,” Ludden said, “…17% of them won’t even be able to make $500 million [over the 12 months ending June 30, 2023].”
Ludden added that consolidation in the IMB space over the next year is expected to reach 30%, which means nearly a third of the top 1,000 IMBs are expected to merge or disappear by the end of 2023.” And names that will disappear from corporate records, about a third [roughly 100] will go bankrupt and two-thirds [about 200] will merge.
The big hub?
Despite the dire outlook, some will benefit from the consolidation period, according to several market observers.
Leon Wong, a partner at Waterfall Asset Management, said at this point “we’re probably in the early innings of a clean-up exercise on housing finance, the non-bank originator [IMB] side.”
“We are really focusing on non-bank originators who have to solve their liquidity problems on their own over the next two years,” he added. “A solution to this could be to increase two additional asset classes – like HELOC [home-equity lines of credit] and second mortgages, or reverse mortgages.
In fact, some of that is already happening, according to Sterling’s Ludden.
“Several lenders are telling us they just don’t have the ability to continue, and some are telling us they are closing, while others are desperately trying to cut costs even beyond what I think is probably achievable cost reduction,” Ludden explained. “A small East Coast lender has within the past two months obtained its California license and is now focused almost exclusively on high-cost operations. reverse mortgage transactions in California because that’s the only way they think they can potentially survive without having to go out of business.
Tom Piercy, chief executive of the Colorado-based company Incenter Mortgage Advisorssaid the outlook for the housing industry in general “is poor for the foreseeable future.”
“[However,] this could be very good for companies that are well positioned on their balance sheets – meaning lower debt ratios and strong cash or liquid assets, and profitable retail set-ups,” he added. “They will see the opportunities expand.”
For others, he said, “this could be the time when many long-time, small to medium-sized originators are looking to sell their lending platform or a joint venture with the right partner who helps them through these most difficult times”.
Andrew Rhodes, senior director and head of transactions at MCT, said there was no doubt the mortgage market would consolidate, but stressed it was after “record profits and boom years”.
“Optimistic and well-prepared companies are beginning to see opportunities to recruit key personnel and prepare for a [future] refinance the boom when rates eventually drop,” Rhodes said.
The MBA estimates there will need to be up to a 30% decrease in employment in the mortgage sector “from peak to trough”, given the expected decline in production volume compared to the bull years of 2020 and 2021 Still, the MBA offers some hope that a new normal on the interest rate front will emerge by the end of 2023.
“Inflation will gradually decline towards the The Fed’s 2% target by mid-2024,” said MBA Chief Economist Mike Fratantoni.
The Fed-induced spike in interest rates is also subject to market gravity.
“After more than doubling so far in 2022 [recently topping 7%]MBA’s baseline forecast is that mortgage rates will end next year at around 5.4%,” MBA’s recent mortgage market forecast predicts.