Latest report provides strategic advice for lenders considering an exit strategy
October 31, 2022 – GREENWOOD VILLAGE, Colo., – Mergers and acquisitions (M&A) in the mortgage industry have increased in 2022, and the consolidation will continue in 2023, according to STRATMOR Group’s October Insights Report. “By the end of 2022, we anticipate that nearly 50 M&A transactions will be announced or closed,” according to David Hrobon, STRATMOR Group Principal, who penned this month’s InFocus Report “Consolidation in the Mortgage Industry: M&A Strategies for Lenders.” That number represents 50% more transactions than in 2018, the next highest year of lender consolidations in the past three decades, the report notes.
The strategic plans lenders were using in 2022 may not have been based on the right assumptions, Hrobon writes in the October report. “2022 was difficult, at best, for residential mortgage companies to prepare for and develop their annual plans. It is turning out far differently than most expected.”
That’s due, in part, to the changes the industry experienced this year.
- Independent Mortgage Banker (IMB) average performance is about break even.
- Volume is predicted to be down 50 percent from 2021 levels and 2023 projections are down a bit more.
- Net production income is trending towards its lowest point since 2018.
Hrobon says there is plenty of opportunity for both buyers and sellers, but structuring good deals is harder now than it was in previous years. Lenders that sold companies in 2018 or 2019 found they had a good amount of flexibility. Today, there is almost no margin of error in M&A deals.
The expectation of continued margin compression in 2023 and 2024 is driving industry consolidation. Despite this, buyers are active in today’s market and prepared to pay reasonable upfront premiums for well-matched opportunities, Hrobon writes.
“STRATMOR has been pointing to increased M&A activity for over a year and, in fact, that’s exactly what we are seeing in the market now,” Hrobon says. “It is a good idea for lenders to continually evaluate their options, and a well-qualified advisor can lead a lender through the process to ensure that everything important is taken into consideration. It is never too late to take a data-driven assessment of your company’s market position.”
Hrobon says buyers are searching for synergy with mortgage companies and they’re willing to pay well for it if they can find a seller with a very similar culture and business model. STRATMOR research shows that well-aligned deals where both the buyer and seller are good matches frequently result in transaction synergies that total 30 – 50 basis points (bps). In other words, a lender that is operating at a 10-bps loss has an opportunity to align with another firm and convert the bottom-line performance to a 20 – 40 bps profit. “Well-matched relationships can and should result in a ‘one plus one equals three’ transaction,” Hrobon writes.
But potential buyers are being very careful. They know full well that the surest way to drain value out of an M&A event is to combine two firms that do not match up culturally. Because cultural alignment is one of the most important ingredients in the success of a transaction, both buyers and sellers must fully understand what their own culture is before they can determine whether a potential deal makes sense. In the October report. Hrobon outlines three types of company culture.
And deciding whether a deal makes sense is difficult without expert, objective support and advice. STRATMOR works with both buyers and sellers to help them determine which industry players have the potential to make good partners.
Find the entire article in this month’s Insights Report.
A second article by STRATMOR Customer Experience Director Mike Seminari, “How to Play the Long Game in Mortgage Originations,” takes a look at what mortgage originators can learn from American League baseball player Aaron Judge of the New York Yankees. Judge recently hit his 62nd home run of the season, breaking Roger Maris’ 61-year-old American League record.
To reach your goals, Judge says you must follow a routine, be consistent and let everything fall into place. “There is a big lesson in this for mortgage originators in the current market,” Seminari writes. “There is no magic marketing email or campaign that’s going to launch another revenue windfall the likes of 2021. It’s going to take hard work, day-in and day-out, for loan originators (LOs) to pull out of the current slump.” Seminari offers LOs advice on creating more visibility with friends and family, as well as tips for providing more value to referral sources.
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.