Lenders must choose to stay in the fight: Stratmor

Mortgage companies active in production have tough business decisions to make after what was a tough second quarter for the industry, according to new research from Stratmor Group.

“Lenders can decide to fight, sell or close, but they certainly cannot stand still,” concludes the report released Thursday by the consultancy.

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

It also comes after widespread layoffs in the industry at lenders like Better.com (which is would have planned a fourth round), New American Funding and Open Mortgage, to name a few. In addition, a small number of mortgage origination companies have closed or filed for bankruptcyand merger and acquisition activity started to heat up.

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

“There will likely be 50 (M&A) deals this year, and this is the biggest since 2018, when there were 33,” he said. “For a frame of reference, out of the top 1,000 mortgage companies, 50 will sell, so it’s not a huge number, but there will definitely be some that fold.”

Stratmor’s estimates are based on the inverse relationship between profitability and trading volume. The consultancy predicts that the industry will only produce 2 basis points of profitability in 2022 after an extraordinarily high level of 82 basis points last year and 157 basis points in 2020, when annual transactions of mergers and acquisitions totaled 29 and 13, respectively. Annual deals have not exceeded 30 since 2018, when net profit last fell below 20 basis points.

Falling profitability and start-ups translate into a likely need to cut the system’s headcount by a third, which is disheartening, but many lenders will have the income from the last two boom years to cushion the blow, said Graham.

“The fact that we had such good profitability for two years is different from 2018, when we were coming out of 2016 and 2017, which were decent years, but not huge,” Graham said.

This 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 arranging acquisitions and cutting layoffs, he said.

Another strategy that some players seem likely to pursue given the current market challenges is a shift from banker to broker in cases where companies no longer want to run third-party warehouse lines of credit to fund their lending pipelines.

Several companies have had to readjust their credit lines due to recent changes in their financing needs, for example Recent deposit of securities from loanDepot indicating that he would prepay a warehouse securitization facility because of this.

Asked how the large number of publicly traded companies in the market could affect the outlook, Graham said they would also likely be key players in consolidation fueling M&A activity, and some could go private. .

The wholesale channel will likely remain strong within the industry in the near term, but the price war currently underway introduces some uncertainty into its outlook, he said.

While at least a monoline wholesaler announced loanDepot’s decision to leave this part of the business indicatively this can be difficult as part of a multi-channel strategy, Graham believes this could be a viable option for some gamers.

“You can argue that’s great coverage to be in multiple channels,” he said. “You just have to be able to adapt quickly.”

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