Consolidation of the US mortgage industry continues
M&A trends and outlook
Market participants looking to grow their businesses and maintain profit margins will need to aggressively leverage new technologies and global labor sources. Long-term growth in a market with stagnating volume is expected to be achieved through M&A activity.
The amount of capital required and the cost to originate and service mortgage loans continues to rise due to regulatory changes driven by Dodd-Frank and Basel III, and is further affected by prolonged low interest rates in the US.
- Growth of non-bank lenders – Non-bank mortgage originations have increased dramatically over the last few years. Non-bank lenders such as Freedom Mortgage, Quicken Loans, PennyMac, Nationstar, PHH Mortgage and Loan Depot accounted for over 45% of mortgages originated in 2015, compared to 13% in 2011. There is an expectation that non-bank lending could surpass bank mortgage lending in the near term.
- Industry consolidation through business acquisitions - High regulatory costs from new lending and servicing requirements will continue to force smaller and midsize market participants, unable to achieve economies of scale, to be takeover targets from their larger competitors to maintain profit margins
- REIT industry consolidation – The theme of consolidation impacted the REIT space as well as traditional mortgage lenders. 2015 and 2016 saw high levels of REIT transactions, including ten deals in the first nine months of 2016. However, this consolidation trend in the REIT industry may be impacted in 2016 due to the recent Financial Industry Regulatory Authority (FINRA) regulatory scrutiny on the growing non-traded REIT market.
The number of mortgage business deals in 2016 has exceeded the numbers in 2015, whereas the number of portfolio acquisitions appears to have slowed down. The first nine months of 2016 saw 24 mortgage business acquisitions, on pace to eclipse the 21 deals that occurred in 2015.
- Banking M&A
M&A is expected to continue to accelerate as organic earnings per share (EPS) growth challenges continue to persist and the cost of capital is exceeding returns for many players. Activist pressure is also seizing on strategic and financial vulnerabilities.
- Loan portfolio acquisitions
Pressures on top-line growth of banks from the low interest rate environment are expected to continue the momentum of loan portfolio acquisitions, as seen in 2014 and 2015, in order to achieve a boost in net interest income, although the momentum may change if interest rates begin to increase.
- FinTech as an opportunity to cut costs
Streamlining the sales process through an electronic documentation process may help certain lenders lower their origination costs. Developing these capabilities on one’s own requires high capital expenditures and bears risks of failure. Investing or partnering with FinTech companies or acquiring a competitor that possesses the desired digital technology is becoming a more preferred option. Growth of blockchain and the use of distributed ledger may also help mortgage servicing businesses lower their administrative cost burdens.
- Asset acquisitions
Industry analysts expect 2016 asset-based acquisitions to surpass their 2015 levels. While deal activity during the first nine months of 2016 has been slow due to economic uncertainty, mortgage portfolio acquisitions are expected to increase during the remainder of 2016 to surpass their 2015 levels, as various mortgage lenders have publicly stated their intentions as future 2016 and 2017 buyers.
- Industry consolidation
The bulk of the deals in the mortgage space over the last three years were strategic acquisitions of small- to medium-size mortgage lending businesses. High regulatory costs from new lending and servicing requirements will continue to force smaller and midsize market participants, unable to achieve economies of scale, to be takeover targets from their larger competitors to maintain profit margins. The need to consolidate will increase M&A activity in the last three months of 2016 and beyond.
- REIT deal activity
2015 and 2016 saw high levels of REIT transactions, including ten deals in the first nine months of 2016. This consolidation trend in the REIT industry may be impacted in 2016 due to the recent Financial Industry Regulatory Authority (FINRA) regulatory scrutiny on the growing non-traded REIT market.
- MSR deal activity
MSR valuations experienced impairments in Q1 2016 due to the continued low interest rate environment, which results in higher prepayments from loan refinancings. This uncertainty has led to a slowdown of servicing businesses/MSR portfolio deals; however, this trend is expected to reverse when interest rates increase. REITs, however, may become an attractive investment opportunity for various investors as buyers look for safe havens post-Brexit, especially if the adverse effects of Brexit are long-term.