50 mortgage industry mergers and acquisitions likely this year

Mortgage players mired in a depressed market can produce a 30-50 basis point swing in operating profits with a shrewd merger or acquisition, a Stratmor Group study suggests.

Nearly 50 industry mergers and acquisitions are expected to close by the end of the year, soaring past the previous record of 33 in 2018, according to Stratmor's October InFocus report. A transaction between companies with well-aligned cultures and models could produce a significant swing in fortunes, the consultancy said. 

"Meaning, a lender that is operating at a 10 bps loss, has an opportunity to align with another firm and convert the bottom-line performance to a 20 to 40 bps profit," wrote David Hrobon, group principal at Stratmor Group and author of the report. "Well-matched relationships can and should result in a 'one plus one equals three' transaction."

Anticipated margin compression in the next two years is causing consolidation, Stratmor said, citing data from the Mortgage Bankers Association's October 2022 Forecast and its Q2 2022 Quarterly Performance Report. Other M&A could stem from pent-up demand for retirement from aging business owners who've reached net worth objectives, the report said.

Origination projections continue to slide as the MBA last month predicted $2.257 trillion in volume in 2022, a decline from its September forecast of $2.324 trillion for the year. Production is expected to bottom out in 2023 with $2.047 trillion in volume before rebounding to $2.311 trillion in 2024, according to the association's latest evaluation.

Merger and acquisition activity is rising as the industry is expected to sit at 2 basis points of profitability this year, from heights of 82 basis points last year and 157 basis points in 2020. Last year, there were 29 M&A deals, while the industry saw 13 such moves in 2020. The 50 M&As expected this year would be approximately 50% more than the 33 deals in 2018, the next-busiest year of such agreements in the past three decades. 

Deals have been struck in all sectors of the industry, with brokerages, lenders, servicers merging or scooping up competitors. Some transactions have been massive, like Intercontinental Exchange's pending $13.1 billion purchase of Black Knight, while others have failed to close, like Guaranteed Rate's alleged negotiations for Finance of America's doomed forward mortgage originations business.

Stratmor warned that structuring successful M&As was harder than in previous years, when lenders had more flexibility. Companies mulling a deal must be aligned in their corporate culture, Hrobon wrote. The study defined three types of lender corporate cultures, including firms that limit risk and avoid costly non-compliance costs; companies with entrepreneurial leadership willing to accept some more risk; and businesses that operate "under their own set of rules," resisting formality and structure. 

"A sure way to drain value out of an M&A event is to combine two firms that do not match up culturally," wrote Hrobon. "Of all the things that can go wrong during one of these complex transactions, a cultural mismatch is the most damaging aspect to post-deal value."