Record-breaking transactions are drawing investors from outside the industry—
and prompting some companies to question if and when a deal is right for them
October 29, 2020 – GREENWOOD VILLAGE, CO – The unprecedented margins mortgage lenders are realizing in 2020 are resulting in a record year for mergers and acquisitions, according to the latest Insights Report from STRATMOR Group, the mortgage industry’s leading data-driven advisory firm.
Since January, the mortgage industry has witnessed two of the biggest deals in its history: United Wholesale Mortgage’s $16.1 billion merger with a SPAC (special acquisition company), and Intercontinental Exchange (ICE)’s $11 billion acquisition of Ellie Mae. Meanwhile, Quicken Loans’ owner Rocket Companies raised about $1.8 billion in an August initial public offering. In early October the Wall Street Journal pegged the company’s valuation at about $45 billion.
More recently, Guild Holdings Company, an originator and servicer of residential mortgages, announced the closing of its initial public offering of 6,500,000 shares of its Class A common stock at a price to the public of $15.00 per share. The company raised roughly $100 million, creating a valuation of $1 billion.
“These are amazing deals in themselves, but what they mean for the rest of the industry is noteworthy,” writes STRATMOR Senior Partner Garth Graham in his October Insights Report article, “Timing is Everything: Four Must-Know Realities About the Mortgage M&A Market.”
“The M&A deals we’re seeing this year are game changers,” Graham says. “They are record-breaking deals that have investors outside the industry putting money into mortgage banks that are generating solid profits.”
Mortgage origination volume in 2020 is on track to be over $4 trillion, the largest in history, Graham notes. “With a market expected to set records for origination volume and profitability, most lenders are riding high in 2020.” At the same time, large independent mortgage banks are “flush with retained earnings and are seeking to grow via acquisition to compensate for expected market volume declines. It’s a robust and indisputable sellers’ market.”
The IPO activities for a handful of the largest independent mortgage bankers has accelerated with the public offering of Rocket Mortgage and United Wholesale Mortgage, according to Graham. “In fact, STRATMOR data shows equity investors or public companies now hold interest in 17 of the top 25 IMBs, accounting for more than 40 percent of the total IMB market,” he writes.
“In years’ past, we saw strong companies buying weaker counterparts, but this year, we’re seeing strong buying strong,” he notes. “Buyers are willing to buy at a higher valuation because the entire market benefits from production momentum and because they see a multiple in the value they can add, albeit with stronger technology, better capital markets execution or consolidation savings.”
Graham writes that companies contemplating a merger or acquisition (M&A) deal need to carefully consider when to make their move. He notes that some potential sellers may be resistant to sell right now when they are doing so well.
“Of course, lenders that hesitate may be missing an opportunity to sell when they are ideally positioned to negotiate from strength,” Graham writes. “Opportunistic timing and execution are certainly part of the consideration, but so, too, are some of the economic fundamentals driving our industry.”
Graham advises lenders considering a deal, whether as a buyer or a seller, to keep some key facts in mind to maximize their chances of a successful merger or acquisition. For starters, lenders should retain an advisor experienced in the mortgage business and in company valuations.
An effective advisor can also help with matters like due diligence and weighing risks, Graham said. “Without question, the greatest value provided by an effective advisor is determining whether the cultures of two companies are reasonably compatible,” he notes. He added that an independent advisor is often better suited to offer an objective assessment on the strategic fit for both parties.
In a second article in the October Insight Report, “Originator’s Guide to Surviving Market Constriction,” Mike Seminari, director of STRATMOR’s MortgageSAT Borrower Satisfaction Program, advises originators on best practices to insulate themselves from market constriction. “Projected industry loan volume for 2021 is expected to be down roughly 30% from 2020,” Seminari writes. “Oddly, few lenders, and even fewer originators, seem to notice.”
According to Seminari, originators interested in investing in long-term career growth should have three focal points: relationships, good habits and personal brand. For example, originators can create good habits by writing down all of the best practices they would like to implement. “Choose three and focus on drilling them in as habits by year-end,” Seminari writes.
Click here for the October 2020 edition of STRATMOR’s Insights Report.
About STRATMOR Group
STRATMOR Group is a leading mortgage industry advisory firm that provides a range of programs and services designed to counsel lender CEOs and senior executives. STRATMOR serves more than 250 companies annually, providing strategies that increase growth and improve profitability in sales, marketing, technology, operations and mergers and acquisitions. The company leverages comprehensive, propriety data and key insights gained through extensive experience in the mortgage industry. STRATMOR is well known for its financial models and its collaboration with the Mortgage Bankers Association in the PGR: MBA and STRATMOR Peer Group Roundtables Program. Find out more about STRATMOR on its website at www.stratmorgroup.com.