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The great mortgage bank consolidation wave is underway

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Of the 130 or so IMBs that made between $1 billion and $2 billion in 2021, 17% will make $500 million in the 12 months ending June 30, 2023, said one mortgage M&A expert. We think we can’t even reach the dollar.

Of the 1,000 largest independent mortgage banks, up to 30% are projected to disappear through sale, merger or bankruptcy by the end of 2023.

This is a prediction by Brett Ludden’s Managing Director. Sterling Point Advisoris a mergers and acquisitions (M&A) advisory firm based in Virginia.

“We have a large number of buy-side and sell-side clients, and we speak regularly with many more industry owners and CEOs,” said Ludden. “For a large cohort of industries, the outlook is not good.”

This is especially true for independent mortgage banks (IMBs), which have relied too heavily on refinancing production in recent years.of Mortgage Bankers Association (MBA) project refinancing will drop 24% next year compared to 2022 to $513 billion. This is after plummeting from his $2.6 trillion in 2021.

The outlook for Sterling’s industry consolidation is even more dire than predictions recently provided by the New York-based company’s managing partner and co-founder Tom Kapas. Waterfall Asset Management, A global alternative investment manager with approximately $11 billion in assets under management. Capasse works from a much larger IMB base, including many of the largest, over 1,000 smaller lenders. Predicted to be about 20% 80% of the IMB segment will disappear in the next 18 months to 2 years through sales, mergers, or failures.

“Lenders who go all out to refinance when business booms are reaping huge profits.” stratmore group, a Colorado-based mortgage advisory firm. “But the tide will always eventually turn, when many of those lenders are struggling to survive.

For small lenders who were lending between $125 million and up to $250 million in 2021 [a 14% slice, or some 140 IMBs]72% [about 100] Less than $125 million over the next 12 months [ending June 30, 2023].

Brett Luden, Managing Director of Sterling Point Advisors, said:

“We’ve seen a lot of it this year, and it will certainly continue in 2023. increase.”

Stratmor predictions About 50 M&A deals involving IMB are expected to be announced or closed by the end of the year. This is a 50% increase from 2018, “the year of the next highest lender consolidation in the last 30 years.” Stratmor report status.

When is it time to eat minnows?

According to Stratmor principal David Hrobon, the enthusiasm for consolidation is driven by several factors. They include: IMB performance We are on average breaking even this year. This year’s composition volume he is down 50% from 2021 levels and is expected to drop further next year. “Net production income is heading towards its lowest point since 2018.”

“It took years to get to this point, largely driven by Federal Reserve policy to keep the Fed’s interest rate at or near zero.” mortgage capital trading (MCT). “Current market conditions have also been impacted by the Treasury Department’s aggressive purchase of his MBS. [mortgage-backed securities] To maintain stability in capital markets.

“Both of these actions create artificial demand, and when we remove it, the market adjusts dramatically. It could take years for things to normalize.”

To better illustrate what’s going on in the mortgage industry, Sterling’s Ludden provided estimates for mortgage originations of 1,000 maximum IMBs broken down by production tranches.

We are probably in the first few innings of a cleanup exercise on mortgage, non-bank originators. [IMB] side.

Mr. Leon Wong, Partner at Waterfall Asset Management

In calendar year 2021, Sterling estimates that 38% of the largest 1,000 IMBs, or about 380, had a mortgage of $250 million or less. For the same group of 1,000 IMBs, in the 12 months ending June 30, 2023, about 54%, or about 540 IMBs, are projected to generate his $250 million or less mortgage.

“For small lenders who were lending between $125 million and up to $250 million in 2021 [a 14% slice, or some 140 IMBs]72% [about 100] Less than $125 million over the next 12 months [ending June 30, 2023], Ludden further elaborated on the production shift. “They won’t have enough scale to break even, they won’t have enough costs to cut. Do not have.”

A similar downward production shift applies to the high end of the loan production scale.

Last year as a whole, 33% (about 330) of the largest 1,000 IMBs issued more than $1 billion in loans, and 20% (about 200 of 330) had more than $2 billion in mortgage loans, according to Ludden. composition is recorded. In the 12 months to June 2023, only 18% (or about 180) of the largest IMBs are expected to produce more than his $1 billion, of which 10% (or about 100 of 180) will provide $2 billion in loans. that’s all.

“of [13%, or roughly 130] Companies that produced between $1 billion and $2 billion in 2021,” said Ludden. [over the 12 months ending June 30, 2023]”

Ludden added that the consolidation of the IMB space over the next year is expected to reach 30%. This means that nearly a third of the 1,000 largest IMBs are expected to merge or disappear by the end of 2023.About a third disappear from business registers [roughly 100] went out of business, two-thirds [about 200] merge. “

great pivot?

Despite the dire outlook, some will benefit from the consolidation period, according to multiple market observers.

This could be a time for many long-term small and medium-sized originators to consider selling their loan origination platforms outright or a joint venture with the right partner to get them through these most challenging times. there is.

Tom Pearcy, Managing Director of InnCentre Mortgage Advisors, said:

Leon Wong, partner at Waterfall Asset Management, said at this point: [IMB] side. “

“Our focus is non-bank originators who will have to work on themselves in terms of liquidity over the next few years,” he added. “One of his solutions is to augment two additional asset classes. HELOC [home-equity lines of credit] A second lien loan, or reverse mortgage. “

In fact, according to Sterling’s Ludden, some of that has already happened.

“Some lenders have told us there is no way to continue, some have informed us that they are closing their doors, and we are more desperate than I think is possibly feasible cost savings. “One small East Coast lender obtained a California license in the past few months and is now focused almost exclusively on high-value transactions. reverse mortgage transaction Because that’s the only way they think they could potentially survive without essentially going out of business. “

Tom Piercey, managing director of the Colorado-based company Inncentre Mortgage Advisorsaid the outlook for the housing industry was generally “poor for the foreseeable future.”

“[However,] “The potential is very good for companies that are well-positioned on their balance sheets – those with low debt ratios, high levels of cash or liquidity, and cost-effective retail origination.” he added. “They will see opportunities expand.”

For others, “This means that many long-standing small and medium-sized originators are either selling their loan origination platforms outright or forming joint ventures with the right partners to get them through these most difficult times. It may be time to consider it.”

MCT senior director and head of trading Andrew Rhodes said there was little doubt the mortgage market would consolidate, but that would come after it had “turned off record profits and a booming economy.” emphasized that there is

“Optimistic and well-prepared companies are beginning to see opportunities to pick up and prepare key staff. [future] A refinancing boom when interest rates finally come down,” Rhodes said.

The MBA estimates that mortgage industry employment will need to fall by up to 30% “from peak to trough” given the projected decline in output from the 2020 and 2021 bull years. increase. By the end of 2023, the new normal for interest rates will emerge.

“Inflation is Federal Reserve’s 2% Target By mid-2024,” said MBA chief economist Mike Fratantoni.

Interest rate spikes by the Federal Reserve are also subject to market pull.

“After more than doubling by 2022, [recently topping 7%]the MBA’s baseline forecast is for mortgage rates to end next year at around 5.4%,” predicts the MBA’s recent mortgage market forecast.

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