Lenders must choose whether to stay in the fight: Stratmor

Mortgage companies active in production have some tough decisions to make about their businesses following what was a tough second quarter for the industry, according to a new Stratmor Group study.

“Lenders may decide to fight on, sell or shut down, but they certainly cannot stand still,” the report the consultancy published Thursday concludes.

The pronouncement follows recent release of numbers from a Mortgage Bankers Association survey showing only 57% of respondents were profitable in the second quarter, and the average loan generated a loss of $82.

It also comes in the wake of widespread industry layoffs at lenders like Better.com (which is reportedly planning a fourth round), New American Funding and Open Mortgage, just to name a few. In addition, a trickle of mortgage origination firms have closed or filed for bankruptcy, and merger and acquisition activity has started to heat up.

M&A activity in particular could be higher than it has been in several years as consolidation takes hold, although that doesn’t necessarily mean it will run rife throughout the industry, said Garth Graham, senior partner at Stratmor Group, in an interview.

“T. are likely going to be 50 (M&A) deals this year, and that’s the biggest since 2018 when t. were 33,” he said. “For a frame of reference, in the top 1,000 mortgage companies, 50 are going to sell, so it’s not a huge number, but t. certainly are going to be some that just fold.”

Stratmor’s estimates are based on the inverse relationship between profitability and transaction volume. The consultancy predicts the industry will only produce 2 basis points of profitability in 2022 after an extraordinarily high 82 basis points last year and 157 basis points in 2020, when annual M&A transactions totaled 29 and 13 respectively. Annual transactions haven’t exceeded 30 since 2018, when net income last fell below 20 basis points.

The decline in profitability and originations translates to a likely need to cut one-third of the headcount from the system, which is daunting, but many lenders will have earnings from the past two boom years to cushion the blow, Graham said.

“The fact that we’ve had such good profitability for two years is unlike in 2018, when we were coming off ’16 and ’17, which were decent years, but not huge years,” said Graham.

That could give some companies options when it comes to adjusting capacity and balancing the budget. Some, for example, make up for lost economies of scale in a slower market by staging acquisitions and cutting redundancies, he said.

Another strategy some players look likely to pursue given the market’s current challenges is a transition from banker to broker in cases w. companies no longer want to manage warehouse lines of credit from third parties to fund their loan pipelines.

Several companies have had to readjust their lines of credit as their funding needs have changed recently, examples of which include loanDepot’s recent securities filing indicating it would be prepaying a warehouse securitization facility because of this.

When asked about how the large number of publicly traded companies in the market might affect the outlook, Graham said they’ll also likely be key players in the consolidation fueling M&A activity, and some may go private.

The wholesale channel will likely persist as a strong one within the industry in the short-term, but the price war currently going on introduces some uncertainty into its outlook, he said.

While at least one monoline wholesaler has heralded loanDepot’s decision to leave that part of the business as an indication it can be challenging as part of a multichannel strategy, Graham thinks it could be a viable option for some players.

“You can make the argument that it’s a great hedge to be in multiple channels,” he said. “You just have to be able to adjust quickly.”



source