There are a lot of reasons for mortgage bankers to expand in today's market, even though it means that a certain degree of consolidation is inevitable as long as recovery remains elusive.
The secondary market—so long as it remains active—can mitigate to some extent the succeed-or-fail risk for companies that maintain a certain degree of quality.
Contenders do not necessarily have to be top dog to survive, but they do have to be attractive enough for top dogs to see value in buying them.
Merger and acquisition appetites can be fickle, but in a down market they are one of the few ways to create the kind of increase in revenue investors want, and this market has been heating up.
“We've just completed a major acquisition. We not only merged a bank and a mortgage company but also brought in capital to them,” David Lykken, managing partner, Mortgage Banking Solutions, Austin, Texas, told this publication.
“There is a significant amount of that going on.” (He said in an interview he could not disclose more details of the transaction.)
Add to this thinner competition in the wholesale channel, unprecedented availability of talent or a need to meet certain higher net worth requirements, and expansion in a contracting market actually makes a lot of sense.
Net worth is “probably one of the single biggest drivers right now that is causing people to [expand despite the challenging origination market],” Lykken said.
“I'd say it is almost singularly net worth for a lot of the companies that are not going to be able to make the new HUD requirements. We are seeing a lot of that, but there is also practical value with investors. It's getting more difficult to do business at the lower net worth levels.
“There is a whole new group of investors trying to meet that niche but the spreads are going to be greater to those with a lower net worth, so if you want to maintain the maximum profitability or maintain your credit margins you are going to go look to get acquired,” he said.
Net worth is not always the motivation, particularly for larger and/or more players that see themselves as specialists.
For example, Mark Greco, president of wholesale-only 360 Mortgage Group, said it is not in his case.
“We've got all the net worth requirements,” he said in an interview last month, adding that the company's motivator for growth is that “quite honestly, we feel like the mortgage broker industry is just absolutely underserved right now.”
While wholesale-only plays like 360's may still be scarce, competition is heating up and reversing in some areas of the industry that have previously been attractive due to the lack of it.
Combine this with the usual concerns about the continuing supply-demand imbalance in the housing markets and weak economy and it looks like there will be more consolidation ahead.
This will be occurring “more amongst the low- to midtier,” said Lykken.
“There are a lot of companies in that category,” he added.
These players will be joining bigger companies or becoming bigger themselves, Lykken said.
In choosing prospects, investors today are not motivated only by volume the way they once were, they are looking at operational strength, said Lykken.
“Capital is flowing into the industry,” he said. “But it is going to those companies that are best in class as far as operations and quality. It is not going to the 'top originator.'”
It is “patient capital,” he said, and it is looking to get into a strong position for “when the market does come back.”
