When things get tough in the mortgage industry, the tough pick up the phone, call their merger and acquisition adviser and try to score a deal.
But this time around, few expect that any of the top 10 players in the industry — the megabanks included — will be the acquirers. (It's unlikely any of the top 10 will be sellers either, though anything is possible.)
Instead, M&A advisers are seeing increased interest from private-equity and joint-venture firms.
"The traditional bank buyers just aren't there anymore," said Larry Charbonneau, a mortgage adviser in Texas. "I've not seen them."
Not only has the mortgage industry been transformed over the past three years, its future is up in the air: Banking regulators are cracking down on everything from loan officer compensation to how much servicing rights can be counted toward capital. And then there's the issue of Fannie Mae and Freddie Mac. Will they even be around in five years?
Charbonneau and other M&A consultants said that there is still strong interest in mortgage banking for two simple reasons: Profit margins on new originations are the best they've been in years, and despite all the changes (with more to come), smart money investors continue to be drawn to the industry, albeit with reduced expectations.
New originations are forecast to decline by 30% this year. However, the yield on the 10-year Treasury is starting to fall again, meaning mortgage rates, which tend to track that benchmark bond, could fall, too, and in theory boost refinancings.
"I'm having two to three conversations a week" about M&A transactions, said Chuck Klein, managing partner of Mortgage Banking Solutions of Woodway, Texas.
The firm is working on four sales transactions, which it could not identify because they have yet to close.
Charbonneau, who manages an advisory boutique that bears his name, said he's talking to a handful of firms that are just $1 million or so away from meeting the new government-sponsored enterprises and Federal Housing Administration minimum capital requirements of $2.5 million to be an approved lender.
"I also get inquiries from guys who are worried about the new loan officer compensation rules who call and say, 'Can you find me a home?' " Charbonneau said.
He is seeing private-equity and joint-venture firms beginning to kick the industry's tires. "In particular, some are looking for firms with balance sheets of $10 million to $50 million," he said.
Over the past year there have been very few "whole company" transactions, though several servicing portfolios have changed hands.
Selling a servicing portfolio can be much simpler than selling a company.
Many investors that are eyeing the industry want turnkey operations that are ready to hit the ground running.
"If you have your (Government National Mortgage Association) approvals you're like gold now," Charbonneau said.
Klein estimates that the agency approvals and licenses alone are worth $500,000 to $1 million.
Meanwhile, at least one trade group official thinks that it's only a matter of time before the minimum capital requirement is raised further in the coming years.
"It's $2.5 million now," said Glen Corso, managing director of the Community Mortgage Banking Project. "I think it's going to $5 million. But that's just my opinion."
