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<\/figure>\n<\/div>\nBy the time 2022 is wrapped up, mortgage lenders will have originated about $2.2 trillion in loans, about half of 2021’s $4.4 trillion in volume, according to industry forecasters<\/a>. But Brian Hale, who is assisting several buyers in their hunt for independent mortgage bank acquisition targets, sees an even more brutal landscape ahead. He projects that over the next 12 months, mortgage originations nationwide could come in as low as $1.3 trillion to $1.7 trillion.<\/p>\n That\u2019s an ugly scenario. With such a drastic downturn, the pressure for industry consolidation<\/a> increases dramatically. As part of the restructuring, there will be winners (the buyers) and there will be losers \u2014 those whose names disappear from the corporate registries due to sales, mergers or failure, observers told HousingWire. <\/p>\n Based on numerous interviews with mergers and acquisitions experts, we dove into the 2023 IMB buyer profile. <\/p>\n Brett Ludden, managing director of Sterling Point Advisors<\/strong><\/a>, a merger and acquisitions advisory firm based in Virginia, projects that nearly one-third<\/a> of the 1,000 largest IMBs will disappear by the end of 2023 via mergers, acquisitions or failures. <\/p>\n Most homebuilders \u2026 leave that excess [potential business] on the floor, but the smarter homebuilders look at that and go, \u2018There’s an opportunity there.\u2019<\/p>\n Brian Hale, CEO of mortgage advisory partners<\/cite><\/p><\/blockquote>\n<\/figure>\n Hale, founder and CEO of California-based Mortgage Advisory Partners<\/strong>, said that level of consolidation in the IMB industry \u201cwould not shock me.\u201d He added, however, that it could turn out to be a lower number because some mortgage bankers may \u201cfigure out how to shrink costs\u201d and hang on through the downturn.<\/p>\n Still, consolidation is clearly underway in the mortgage banking industry already. Within the past week, one of the nation\u2019s largest retail mortgage lenders, Charlotte-based Movement Mortgage<\/strong>, announced the acquisition of Mortgage Network, a deal that would add $2 billion in annual loan volume, 250 mortgage professionals and 31 branch offices to its network.<\/p>\n Hale added that another large IMB, California-based Guild Mortgage<\/strong><\/a>, also \u201cappears to be in a substantive acquisition mode.\u201d In addition, Hale said he is currently working with three clients who are looking to buy IMBs \u2014 two of which are homebuilders and one he described as a \u201cproptech\/fintech\u201d company. <\/p>\n Hale, of course, could not reveal the names of those clients, although he did define the type of acquisition targets they are seeking to find as buyers.<\/p>\n \u201cThe profile that we created [for our clients] is we want companies with multiple state licenses and all three tickets \u2014 Fannie Mae<\/strong>, Freddie Mac<\/strong> and Ginnie Mae<\/strong> \u2014 so the buyer ends up with a fully functioning mortgage-banking company that has warehouse and agency relationships,\u201d Hale said.<\/p>\n For the homebuilders he is representing, Hale said acquiring a mortgage-lending operation is a smart way to take advantage of \u201clow-hanging fruit,\u201d among other drivers for such an acquisition.<\/p>\n \u201cFor every 100 buyers who walk into a community showroom, [a homebuilder] sells 8% to 15% of those buyers a home in their community,\u201d Hale said. \u201cThe rest of those people are still looking for a house. <\/p>\n \u201cIf you deliver 5,000 homes a year, that means you had 50,000 people looking for a house walk across your platform who are likely prequalified by your loan officers, and you \u2026 have a relationship with them. Most homebuilders \u2026 leave that excess [potential business] on the floor, but the smarter homebuilders look at that and go, \u2018There’s an opportunity there.\u2019\u201d<\/p>\n Hale added that is \u201cwhy homebuilders want to be in the mortgage business.\u201d<\/p>\n David Hrobon, a principal with the Colorado-based mortgage advisory firm the Stratmor Group<\/strong>, in a recent report<\/a> projected that some 50 merger or acquisition deals will be announced or closed by year\u2019s end, which is 50% more transactions than in 2018 \u2014 the prior high-water mark for lender consolidations over the past three decades.<\/p>\n The key driver of that is the [loan-production] volume from the seller is worth more to the buyer than it is to the seller, due to the synergies that the buyer brings. <\/p>\n Garth Graham, senior partner at stratmor group<\/cite><\/p><\/blockquote>\n<\/figure>\n \u201cLenders that turn all their attention to refinancing when that business skyrockets enjoy huge profits,\u201d said Garth Graham, senior partner and manager of M&A activities for the Stratmor Group<\/a>. \u201cBut the tide always eventually turns, and when it does, many of those lenders struggle to stay afloat. <\/p>\n \u201cWe\u2019re seeing a lot of that this year, and it will certainly continue in 2023.\u201d<\/p>\n Graham said most of the acquisition deals will likely involve larger IMBs buying smaller IMBs because those larger players, unlike the smaller players, have the scale to make money off added loan production \u2014 without adding significant additional expenses. <\/p>\n \u201cThe key driver of that is the [loan-production] volume from the seller is worth more to the buyer than it is to the seller, due to the synergies that the buyer brings,\u201d Graham said.<\/p>\n Thomas Yoon, president and CEO of California-based non-QM lender Excelerate Capital<\/strong>, which is owned by the company\u2019s chairman, Mike Thompson<\/a>, said for the top 200 IMBs, M&A deals may be a workable option. For the middle-tier lenders not in that group, however, Yoon expects so-called \u201cplug and play\u201d deals to be attractive because they are far more cost-effective.<\/p>\n \u201cSo, it’s kind of like, we don’t want your debt. We don’t want all your problems, but we’ll take your core people,\u201d Yoon said. \u201cThey’re like, \u2018Screw the company. We\u2019ll just buy the talent [i.e., loan officers] in pods.\u2019\u201d<\/p>\n Another path to survival for some IMBs, according to Ludden, might be to convert to a brokerage operation.<\/p>\n These people have a lot of wealth, and if they are choosing to invest in a different direction, they might choose to take the gains and free up the equity to invest in their newest ventures.<\/p>\n Brett Ludden, managing director of Sterling Point Advisors<\/cite><\/p><\/blockquote>\n<\/figure>\n \u201cWe’re seeing correspondent lenders that are considering making the choice to transition back to being purely brokers because that allows them to jettison a substantial amount of costs,\u201d he said. \u201cSo, while that company may not fail, it’s changing its business model significantly.\u201d<\/p>\n \u201cWe\u2019ve recently had several lenders tell us that they have just no avenue to continue,\u201d Ludden added. \u201cSome inform us that they will be closing the doors, while others are desperately trying to cut costs, even beyond what I think is probably feasible cost cutting.\u201d <\/p>\n Some lenders, he added, are even changing their origination focus to survive. <\/p>\n \u201cA small East Coast lender, for example, has in the last couple of months picked up their California license and is now almost exclusively focused on doing high-dollar reverse mortgage transactions <\/strong>in California,\u201d Ludden said.<\/p>\n Ludden also expects that IMBs owned by wealthy individuals or families \u201care going to be some of the biggest buyers.\u201d Among the IMBs that fit that description are Freedom Mortgage<\/strong>, Academy Mortgage<\/strong>, Gateway Mortgage<\/strong>, New American Funding<\/strong>, Movement Mortgage<\/strong>, CMB Financial<\/strong>, Vistal Point Mortgage<\/strong>, Excelerate Capital <\/strong>and more.<\/p>\n Ludden stressed, however, that just because they are privately held by wealthy individuals does not mean they are necessarily in a buying (or selling) mode. Each lender is unique, with different challenges, opportunities and balance sheets, he stressed. <\/p>\n IMBs that are independently owned by a single wealthy investor or a family, however, tend to have more flexibility when it comes to return on investment, or \u201cROI demands,\u201d and they often have \u201ca pool of cash\u201d to draw on to support dealmaking,\u201d Ludden said.<\/p>\n \u201cI don’t think the idea that [some of] these companies might also be looking for exits is inconsistent with the thesis,\u201d Ludden added. \u201cThese people have a lot of wealth, and if they are choosing to invest in a different direction, they might choose to take the gains and free up the equity to invest in their newest ventures.\u201d<\/p>\n This business is really complicated in many ways. It’s also simple in one way: It’s very helpful if you actually make more money than you spend.<\/p>\n Brian Hale, ceo of mortgage advisory partners<\/cite><\/p><\/blockquote>\n<\/figure>\n Hale added that we might even see foreign interests \u2014 such as European or Asian banks \u2014 that are looking for an entry point into the U.S. real estate market consider acquiring an IMB franchise. Regardless of which combination of IMBs find themselves at the M&A alter over the next year, however, it\u2019s clear the face of the industry is about to change to comport with the new realities facing it. <\/p>\n \u201c<\/strong>Overall, we think there is likely a need for more meaningful capacity reduction, given that volumes in 2023 are expected to be down nearly 60% from the peak in 2020,\u201d a recent report by New York-based investment bank and broker-dealer Keefe, Bruyette & Woods<\/strong> states. \u201c\u2026 We also think there is a limit to how much companies can reduce headcount <\/a>without sacrificing technology or damaging morale. <\/p>\n \u201cWe think this creates a challenge that could be supportive of consolidation.\u201d<\/p>\n Hale added that, in the end, there are two predominate ways to acquire a mortgage operation \u2014 an asset purchase or a stock purchase. <\/p>\n \u201cWith an asset purchase,\u201d he said, \u201cyou leave the old entity behind and all the risks associated with it, and it\u2019s really the equivalent of a big hiring transaction, with some cash paid to the original stockholders.\u201d With a stock purchase (the route Hale said his current clients are pursuing), \u201cthe buyer acquires every sin that the seller has committed since the beginning of time,\u201d so Hale said conducting thorough (and often expensive) due-diligence research is essential. <\/p>\n \u201c\u2026This business is really complicated in many ways,\u201d Hale added. \u201cIt’s also simple in one way: It’s very helpful if you actually make more money than you spend.\u201d<\/p>\nWho wants to be in the mortgage business?<\/h3>\n
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The plug-and-play and brokerage routes<\/h3>\n
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The 2023 buyer profile<\/h3>\n
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