Sellers, Buyers, and M&A

Finally we take note of the article in Inside Mortgage Finance on the anticipation of more M&A activity. John Bancroft writes an interesting piece about industry leaders’ anticipations regarding both M&A and MSR transactions. Before the improvement in rates, there seemed to be even more confidence that M&A activity would be strong, but the rally leaves some in the market confused.

As IMF reports, “The market is a bit quiet, at the moment, as lenders try to parse how long the interest-rate rally will last. “Rates have headed down, but there’s more confusion than optimism in the current market,” said Aaron Samples, CEO of First Guaranty Mortgage.

The financial services industry prefers certainty over confusion, that is a core tenant to being able to forecast with accuracy and the recent rally if short lived may only add to confusion. IMF reports that MSR transactions are picking up in some areas. What is key is that while retained servicing can be a natural hedge when production is down, it is also capital intensive. A rate rally like we just experienced likely forces a mark to market on the MSR which is negative and may result in higher prepayments. In addition, the asset may be more valuable sold to offset revenue shortfalls on the production side.

In speaking with some CEO’s in the industry, we have heard the confusion loud and clear. From a northeast non-bank CEO we were told that he feels like his company is in a good place compared to others. “We made cuts early”, he said to us, stating that his operations costs are in line with his revenue to date. A large mid Atlantic lender told us that they are acquiring firms and “made money” in Q1 2019. A west coast non-bank CEO raised concerns telling us that he expects a blood-letting now that the rally has flattened.

We believe the industry is over supplied relative to mortgage demand based on all forecasts. This likely means continued pressure to reduce costs, consideration of offers to buy or sell with ongoing M&A activity, more MSR’s coming to market, and some continued migration for some smaller lenders from banker to broker in an effort to move fixed costs to variable.

It is a dynamic market and we will continue watching as changes to rates and market conditions come to light.