By the end of 2022, mortgage lenders will have issued about $2.2 trillion in loans, about half the $4.4 trillion volume of 2021, according to industry forecasters. But Brian Hale, who assists several buyers in their search for independent mortgage bank acquisition targets, sees an even more brutal landscape ahead. He predicts that over the next 12 months, nationwide mortgages could reach $1.3 trillion to $1.7 trillion.
It’s a nasty scenario. With such a drastic downturn, the pressure for industry consolidation increases dramatically. Under the restructuring, there will be winners (the buyers) and there will be losers – those whose names disappear from company records due to sales, mergers or failures, observers told HousingWire .
Based on extensive interviews with M&A experts, we dove deep into the 2023 IMB Buyer Profile.
Who wants to be in the mortgage business?
Brett Ludden, CEO of Sterling Point Advisorsa Virginia-based mergers and acquisitions advisory firm, predicts nearly a third of the top 1,000 IMBs will disappear by the end of 2023 through mergers, acquisitions or failures.
Most home builders…leave that excess [potential business] on the floor, but the smartest home builders look at that and say, “There’s an opportunity there.”
Brian Hale, CEO of Mortgage Advisory Partners
Hale, founder and CEO of the Californian company Mortgage Advice Partners, said the level of consolidation in the IMB industry “wouldn’t shock me.” He added, however, that this could turn out to be a lower number as some mortgage bankers may “figure out how to cut costs” and hang on to the recession.
Yet consolidation is already clearly underway in the mortgage industry. Over the past week, one of the nation’s largest retail mortgage lenders, based in Charlotte Motion Mortgageannounced the acquisition of Mortgage Network, a deal that would add $2 billion in annual lending volume, 250 mortgage professionals and 31 branches to its network.
Hale added that another great IMB, based in California Guild Mortgage, “also appears to be in substantial acquisition mode”. Additionally, Hale said he is currently working with three clients looking to buy IMBs – two of which are homebuilders and one which he described as a “proptech/fintech” company.
Hale, of course, couldn’t reveal the names of those clients, though he did outline the type of acquisition targets they’re looking to find as buyers.
“The profile we created [for our clients] is that we want businesses with multiple state licenses and the three tickets – Fannie Mae, Freddie Mac and ginnie mae — so the buyer ends up with a fully functional mortgage bank company that has warehouse and agency relationships,” Hale said.
For the homebuilders he represents, Hale said acquiring a mortgage transaction is a smart way to capitalize on “low hanging fruit,” among other drivers of such an acquisition.
“For 100 buyers who walk into a community showroom, [a homebuilder] sells 8% to 15% of those buyers a home in their community,” Hale said. “The rest of these people are still looking for a house.
“If you deliver 5,000 homes a year, that means you have 50,000 home seekers coming through your platform who are probably pre-qualified by your loan officers, and you… have a relationship with them. Most home builders…leave that excess [potential business] on the floor, but the smartest home builders look at that and say, “There’s an opportunity there.”
Hale added that this is “the reason homebuilders want to be in the mortgage business.”
Plug-and-play and brokerage routes
David Hrobon, director of Colorado mortgage advisory firm, The Stratmor Groupin a recent report, predicted around 50 M&A deals would be announced or closed by the end of the year, 50% more deals than in 2018 – the previous high point for lender consolidations over the past three decades.
The main driver of this is the [loan-production] seller’s volume is worth more to the buyer than the seller, due to the synergies the buyer brings.
Garth Graham, Senior Partner at Stratmor Group
“Lenders who turn their full attention to refinancing when this activity is skyrocketing reap huge profits,” said Garth Graham, senior partner and director of M&A activities for Stratmor Group. “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 that will definitely continue into 2023.”
Graham said most acquisition deals will likely involve larger IMBs buying smaller IMBs because these larger players, unlike smaller players, have the ability to make money from additional loan production – without adding significant additional expenses.
“The main driver of this is the [loan-production] seller’s volume is worth more to the buyer than the seller, because of the synergies the buyer brings,” Graham said.
Thomas Yoon, president and CEO of a California-based non-QM lender Excelerate Capital, which is owned by company chairman Mike Thompson, said that for the first 200 IMBs, M&A deals could be a viable option. However, for mid-tier lenders who are not part of this group, Yoon expects so-called “plug and play” deals to be attractive because they are much more profitable.
“So it’s kind of like we don’t want your debt. We don’t want all your problems, but we will take your hard core,” Yoon said. “They’re like, ‘Aim for the business. We’ll just buy the talent [i.e., loan officers] in pods.'”
According to Ludden, another avenue of survival for some IMBs could be to convert to a brokerage operation.
These people have a lot of wealth, and if they choose to invest in a different direction, they might choose to take the gains and free up the equity to invest in their new ventures.
Brett Ludden, managing director of Sterling Point Advisors
“We’re seeing correspondent lenders considering making the choice to go back to being pure brokers because it allows them to get rid of a substantial amount of cost,” he said. “So even if this company doesn’t fail, it’s significantly changing its business model.”
“We’ve recently had several lenders tell us that they just don’t have the ability to continue,” Ludden added. “Some are advising us that they will close the doors, while others are desperately trying to cut costs even beyond what I think is probably achievable cost reduction.”
Some lenders, he added, are even changing their origination focus to survive.
“A small East Coast lender, for example, has within the past two months obtained its California license and is now focused almost exclusively on high-value reverse mortgage transactions. in California,” Ludden said.
The 2023 buyer’s profile
Ludden also expects that IMBs owned by wealthy individuals or families “are going to be some of the biggest buyers.” Among the IMBs that fit this description are Liberty Mortgage, Academy Mortgage, Gateway Mortgage, New US funding, Motion Mortgage, CMB Financial, Vistal Point Mortgage, Excelerate Capital and more.
Ludden pointed out, however, that just because they’re owned by high net worth individuals doesn’t necessarily mean they’re in buy (or sell) mode. Each lender is unique, with different challenges, opportunities and track records, he stressed.
However, IMBs that are independently owned by a single wealthy investor or family tend to have more flexibility with respect to return on investment, or “return on investment requirements,” and they often have “a cash reserve “on which to draw to support negotiation,” said Ludden.
“I don’t think the idea that [some of] these companies could also be looking for exits that are inconsistent with the thesis,” Ludden added. “These people have a lot of wealth, and if they choose to invest in a different direction, they might choose to take the gains and free up the equity to invest in their new ventures.”
This business is really complicated in many ways. It’s that simple in a way: it’s very useful if you make more money than you spend.
Brian Hale, CEO of Mortgage Advisory Partners
Hale added that we might even see foreign interests — such as European or Asian banks — that are looking for an entry point into the US real estate market consider acquiring an IMB franchise. Regardless of the combination of IMBs that will find themselves in the merger and acquisition over the next year, it is clear that the face of the industry is about to change to adapt to new realities. with which he is confronted.
“Overall, we believe there is likely to be a need to further reduce capacity, given that volumes in 2023 are expected to fall nearly 60% from the 2020 peak,” a recent report from an investment bank investment and broker based in New York. Keefe, Bruyette & Woods states. “…We also believe there’s a limit to the ability of companies to downsize without sacrificing technology or hurting morale.
“We believe this creates a challenge that could foster consolidation.”
Hale added that ultimately there are two predominant ways to acquire a mortgage transaction – an asset purchase or a stock purchase.
“With an asset purchase,” he said, “you leave behind the old entity and all the risks associated with it, and it really is the equivalent of a big hiring transaction. , with money paid to the original shareholders.” With a stock purchase (the route Hale said his current clients pursue), “the buyer acquires all the sins the seller has committed since the dawn of time,” Hale said while conducting a search for Thorough (and often costly) due diligence is essential.
“…This business is really complicated in so many ways,” Hale added. “It’s that simple in a way: it’s very useful if you make more money than you spend.”
