When things get tough in the mortgage industry, the tough pick up the phone and call their M&A advisor and try to find a deal to get them out of this industry.
But this time around, few expect that any of the top 10 players in the industry—the megabanks included—will be net acquirers of other firms. (It’s doubtful any of the top 10 will be sellers either, though you never know.)
Not only has the mortgage industry been transformed over the past three years, its future is up in the air: banking regulators are cracking down on everything from loan officer compensation to how much servicing rights can be counted toward capital. And then there’s the issue of Fannie Mae and Freddie Mac. Will they even be around in five years?
As mortgage advisor Larry Charbonneau put it recently: “The traditional bank buyers just aren’t there anymore. I’ve not seen them.”
But the Texas-based Charbonneau and other M&A consultants note that there is still strong interest in mortgage banking for two simple reasons: profit margins on new originations are the best they’ve been in years, and despite all the changes (with more to come) smart money investors are still drawn to the industry, albeit with reduced expectations. (New originations are expected to fall by 30% this year, though at press time the yield on the bench market 10-year Treasury was starting to fall again.)
“I’m having two to three conversations a week” about M&A transactions, said Chuck Klein, managing partner of Mortgage Banking Solutions, Woodway, Texas. Currently, MBS is working on four sales transactions, which the firm could not identify because they haven’t closed. (One involves a bank.)
Charbonneau, who manages an advisory boutique that bears his name, said he’s talking to a handful of firms that are just $1 million or so away from meeting the new GSE and FHA minimum capital requirements of $2.5 million.
“I also get inquiries from guys who are worried about the new loan officer compensation rules who call and say 'Can you find me a home?’” said Charbonneau.
He, too, does not see any of the megabanks stepping up as buyers at this time in the cycle. Instead, he is seeing private equity and joint venture firms beginning to kick the industry’s tires. “In particular, some are looking for firms with balance sheets of $10 million to $50 million,” he said.
Over the past year there have been very few “whole company” transactions, though several servicing portfolios have changed hands.
But selling a servicing portfolio can be much simpler than selling an entire company. Many investors that are eyeing the industry want turnkey operations that are ready to hit the ground running. “If you have your GNMA approvals you’re like gold now,” said Charbonneau.
Klein estimates that the agency approvals and licenses alone are worth $500,000 to $1 million. Asked whether that value can be counted toward a lender’s net worth, Klein laughed and said no. “Cash is still king.”
Meanwhile, at least one trade group official thinks that it’s only a matter of time before the minimum capital requirement is hiked further in the coming years. “It’s $2.5 million now,” said Glen Corso, managing director of The Community Mortgage Banking Project. “I think it’s going to $5 million. But that’s just my opinion.”
