The time for mortgage companies to sell is now, consultant says

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Privately owned mortgage lenders tend not to walk away from the table when they’re winning as they are now, with originations at record highs.

But they might want to consider it, said Garth Graham, a senior partner at industry consultancy Stratmor Group, who recently authored a report on the topic.

“Mortgage bankers just have this uncanny ability to hold off while they are making money and not sell because they just feel like, ‘If I am making so much money why would I sell my company?’” Graham said. “But if you sell, you ought to be doing it from a position of strength rather than a position of weakness.”

It’s hard to say whether the market’s going to get much better than this, he added.

“If you sell on strength now, you know what you got, I can’t tell you what you are going to have in 2021,” Graham said.

He acknowledges timing the market for a sale, purchase or a stock deal in the mortgage industry isn’t easy, as his experience managing Mortgage.com show.

Between the time that publicly traded consumer-direct company went public in the late 1990s and was sold to a bank in 2000, interest rates rose from 7.4% to 8.2%, which dampened originations.

Mortgage.com’s experience echoes a larger trend in mortgage M&A seen in the last five years. It’s generally expected that weak market conditions lead to a wave of consolidation.

The biggest year for acquisitions, public offerings or ESOPs in the past five years was 2018, which was the weakest origination year in the mix, an analysis of Stratmor Group and Mortgage Bankers Association data shows. There were 33 transactions in 2018, when originations totaled $1.6 trillion.

In comparison, 12 deals were completed in 2020, according to the report. Forecasts for total volume in 2020 vary widely but generally call for a record-breaking year in which between $3 trillion and $4 trillion will be originated. The MBA estimates it will be a $3.2 trillion year.

It’s also an unusual year given the pandemic has weakened many parts of the economy outside the main government-related mortgage markets, which have been bolstered by rate stimulus and housing inventory shortages.

That’s contributed to the fact that, while a relatively small number of transactions have occurred, some high-profile nonbank mortgage companies have gone public. M&A transactions have been more prevalent than stock deals in recent years.

While Graham advises caution when it comes to the outlook for 2021, he does think publicly traded mortgage companies could do well next year.

“Even if there is going to be cyclicality in earnings next year, they are still likely going to be pretty darn strong. There are a lot of people investing in these companies and that could make them a pretty good bet in the short term,” he said.

Mortgage lenders looking to differentiate themselves while looking to be acquired or go public should evaluate their mix of servicing and origination and the health of their third-party origination channels.

Servicing and originations tend to act as natural hedges for each other when rate cycles shift, and the wholesale channel can potentially be helpful in that context as well.

“Brokers do have some advantages when the market begins to compress in terms of its cost model, but one trick to it is that it can be unbelievably competitive,” he said.

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M&A IPOs Secondary market Capital markets Mortgage rates Originations Housing inventory Mortgage brokers Wholesale lenders ESOPs
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