Home / Daily Dose / Tip of the Iceberg
Print This Post Print This Post

Tip of the Iceberg

tip of the iceberg art

When will it end? The subject of mortgage mergers and acquisitions (M&A) has been written about extensively since 2010—many articles by yours truly—and at the rate things are going, we’re going to see many more. 

Market consolidation in the independent mortgage banking markets has been swift, thanks to several ongoing factors. Among them are the increase in capital requirements for FHA and servicing capabilities, the rapid rise in the cost and complexity of compliance and operations, and the competitive nature of the space that has resisted reductions in loan officer compensation. In fact, loan originator compensation levels have largely been static even as operational costs have grown significantly. 

Ultimately, these dynamics placed a tremendous amount of pressure on the small to mid-size mortgage bank (those with less than $1 billion in annual originations) to seek outside capital or merge with a larger, better-capitalized mortgage company. Consolidation has been persistent for some time, further evidenced by the fact that more than 50 percent of mortgage originations are now performed by nonbanks, a first since the financial crisis. 

The one variable that most economists (and most voters, for that matter) didn’t anticipate was President Trump, and what effect his administration would have on M&A. Below is a summary of factors that will impact the M&A activity in the mortgage market next year. 


Profitability, and more specifically accretive effects on profitability and market share, will be the driving force while engaging with a prospective acquisition target or opportunity. Discussion points around operating culture and other values will be a distant second. With the new administration, the focus on profits and market share will become more aggressive, especially in light of increased housing demand and inventory shortages in most U.S. markets.


Deregulation has a history of spurring consolidation in the mortgage industry­—it occurred both in the 1990s and in the early 2000s, and it’s about to happen again. In fact, deregulation is the Republican-controlled administration’s top priority. They’re already trying to roll back many of the rules created after the housing crisis, which are considered obstacles to growth. That puts Dodd-Frank squarely in the administration’s crosshairs. As far as Trump is concerned, the act puts U.S. financial institutions at a disadvantage in the global market. It’s more than likely banks and lenders will see fewer restrictions in the coming year. 

Already, the President signed an executive order that enables the Treasury Department to restructure parts of Dodd-Frank in ways that will benefit the mortgage industry. As a result, M&A activity will increase substantially as a growth strategy for acquiring firms. Private equity firms have already been increasing investments in mortgage companies such as WestStar, Alterra Home Loans, and others. 


In recent years, lower rates, swelling mortgage banking profits, and mini refinance booms have resulted in significant growth in company values. At the same time, TILA- RESPA (TRID) and other technology-related changes in line with Dodd-Frank regulations, in addition to growing concerns around Fair Lending and its impact on the costs of the manufacturing process, are driving the discussions around M&A due to the burdens these requirements have on smaller organizations. 

In a rising rate environment, the ability to identify and retain high-performing originating and operating leadership is critical for a mortgage lender’s success, that is, if they can afford the increased costs associated to recruiting and retaining such resources. Another option is to consider being acquired by a larger, more financially secure firm. If they don’t sell now, the uncertainty in withstanding market lulls and origination headwinds driven by the rising rate forecast will diminish the values that most mortgage companies experienced over the past two years. 

The Trump Economy

Trump’s election victory drove the construction and material sector stocks soaring, thanks to his commitments to infrastructure spending and broadening new home construction. In parallel to that are Trump’s promises to lower corporate and personal tax brackets, both of which will drive the housing economy. Lower personal taxes will invariably lead to larger down payments on homes, while the pro-growth corporate tax changes will propel executive confidence and deal appetite. 

New tax proposals, another noted priority of the new administration, would tax U.S. companies on accumulated foreign earnings, which could encourage them to bring back at least some of more than $2 trillion currently held abroad. In addition to organic investments and payouts to shareholders, a portion of this capital will go to M&A. 

For a clue about what happens next, one might look to 2005. Following a similar tax holiday in 2004, deal volume involving U.S. acquirers increased 34 percent, according to Dealogic, a financial markets platform. The same thing could happen next year. By 2018, reduced corporate tax rates enacted by the Trump administration will begin to hit company balance sheets. With regulatory relief opening up funding and capital availability, acquisition targets will become more attractive. 


Rates remain at unprecedentedly low levels, effectively two percentage points below rates in 2005—a time when the mortgage market was twice the size it is today. It is worth noting the 10-year and 2-year Treasuries are both hovering around 2008-2009 levels, reflecting a tremendous amount of growth opportunity that can operate in a much more expensive environment to manufacture a loan. 

The upside to this is the growth in the purchase market share. This year, the industry expected to see $1.6 trillion in origination volume. In 2018, we are expected to see a slight decrease at $1.5 trillion followed by a small rebound in 2019 to $1.65 trillion. The boom years, however, will be realized in 2020-2021, when volume is likely to rise aggressively to $2.5 trillion by the end of Trump’s first term. Trump’s economic policies may help (or hinder) these forecasts through expanded job and wage improvements. 

HUD and the Treasury are targets of reductions to agency discretionary budgets, according to Trump’s proposed federal budget submitted to Congress. With increases in Veterans Affairs and Defense, and decreases in HUD and Treasury, it will be interesting to see a possible expansion not only in VA programs but also possibly other programs that are tasked by HUD to expand homeownership through policy, research, and advocacy. 

Right now, we have a growing market share in nondepository originations that exceeded 50 percent of all originations in 2016. This is a trend that is not going to reverse itself anytime soon. Market conditions over the next five years are very favorable to well-capitalized firms and nondepository mortgage banks that aggressively expand across a large, multi-license footprint. Nondepository servicing is at the highest point on record at over 32 percent, also a trend that supports well-capitalized mortgage banks. 

A Perfect Storm 

More than 30 percent of independent mortgage banks will be acquired in the coming 16 months because of these factors, which are directly related to the timing and policies of the Trump administration. The competition for deals will artificially drive company values higher for organizations with annual production volumes between $500 million and $1 billion. 

What happens to these companies from here will depend largely on their size. Companies with less than $500 million annually will be subject to asset acquisitions and will mostly be assimilated due to operating pressures. 

Meanwhile, smaller firms with net worth less than $3 million—which account for over 2,000 mortgage banks nationwide—will be forced to seek outside capital but will likely close or consolidate. The value of such firms is often lower than the sweat equity the owners put into the company, and as such owners will rarely if ever realize what they consider “fair market value” for their firm. But without the needed capital, options are very few.

Not all of the increase in M&A activity can be attributed to the new President’s policies. Consolidation was already picking up steam months before the election. In the first nine months of the year, the number of mortgage industry acquisitions in 2016 had already exceeded the previous year’s, according to Earnst & Young’s November 2016 report. Freedom Mortgage alone, already one of the largest nonbank U.S. lenders, has made five acquisitions since 2014.

Other market factors are likely to contribute to the trend. Housing demand will surge over the next decade, according to the Mortgage Bankers Association, with as many as 16 million new households being formed. Residential construction spending, while not as feverish as it was in the mid-2000s, is on the rise as well.

The bottom line is that the Trump administration is generating a perfect storm for M&A, leaving the remaining mortgage lenders to take advantage of a growing mortgage market in 2018-2021. So if you are tired of reading about M&A activity, you might as well settle in—it’s going to be awhile. 

About Author: Rick Roque, PhD

Dr. Rick Roque is the founder of MENLO, a mortgage and acquisitions firm, whose focus is capital fundraising and retail production growth management and strategies. He can be reached at [email protected] or 413.297.6895.

Check Also

Homebuyer Competition Falls to Early-Pandemic Levels

Now recording its sixth month of decline, homebuyer competition has now fallen to levels seen ...