David Neylan, president and chief operating officer of the retail lender Guild Mortgageexpects the environment to remain challenging for corporate lenders through 2025. But Neylan plans to work through these challenges.
“I know there are predictions that prices will go down, but not as much as everyone had hoped or expected. And this ‘higher for longer’ trend will create continued pressure on profitability, especially for companies that lack scale and size,” said Neylan.
The Guild posted $6.9 billion in first volume in the third quarter of 2024, when it reported a profit in its first quarter – even with a net loss of $67 million due to changes in the market value of its service book. With this funding base, it aims to continue to acquire other companies to gain market share and improve its product offering in 2025.
The pipeline of potential acquisitions is “very strong,” Neylan said. “I would say it slows down a bit in the summer and early fall, but knowing that prices are still up, it’s definitely busy now.”
In February 2024, Guild entered into an agreement to acquire a rival retail lender Company Academy Mortgage Corp.adding 20% to 25% more capacity, 1,000 employees and nearly 200 branches. It was the company’s largest deal in the past 12 months, although it showed a decline compared to 2023, when Guild acquired. Legacy Mortgage in February, Cherry Creek Mortgage in March once First Centennial Mortgage in August.
Like the Guild, the entire mortgage sector slowed the pace of M&A activity in 2024. HousingWire tracked 37 mergers, acquisitions, exits and divestitures involving innovators, service providers, technology platforms, and evaluation and rating companies. This marks a significant decrease compared to the 62 jobs reported in 2023.
By 2024, M&A deals accounted for 76% of total value, followed by exits at 22% and bankruptcies at 2%. But there is a caveat as HousingWire’s reporting likely represents only a small portion of actual activity in 2024. Many deals are not published due to the private ownership of many mortgage companies.
“2024 was going to be a transition year, where prices were expected to start to come down, so we expected M&A to start to come down,” said Brett Ludden, managing partner at . Sterling Point Advisors. “As lenders begin to capitalize again, the expectation is that fewer of them will be interested or need to consider transactions as a strategic tool.”
In fact, after two years of losses, private mortgage banks (IMBs) as a group returned to profitability in the second quarter of 2024, with 78% of them reporting profits. The average 30-year mortgage, which rose to about 7.6% in May, fell to 6.2% in September due to the easing of the monetary policy cycle, according to HousingWire’s Mortgage Rates Center.
“I don’t think many small firms are put in a position where they are forced to sell or forced to sell as expected,” said Jennifer Fuller, managing director at . Houlihan LokeyFinancial services group. “Those companies had a lot of money and other options to continue as private companies, rather than selling what wouldn’t be a profitable investment to book.”
The sellers were primarily companies that were struggling to make a profit. Among the gainers, some founders chose to sell because they were not satisfied with their investment returns.
Buyers, on the other hand, were usually companies aiming to increase the supply of their products or improve their market share in certain regions of the country. Staff also joined M&A activity, focusing on building their real estate repurchase (MSR) portfolios to improve repossession opportunities when prices eventually fall. Scale was driving most of the transactions.
According to Michael Linger, senior vice president of Houlihan Lokey’s financial services group, “some companies still had the option to issue MSRs they had held from 2021 to 2022. However, if you are still selling MSRs this year, you are probably close. the last parts of that portfolio and depending on whether 2025 will be a better year.”
What to expect in 2025
The outlook for 2025 looks weaker than previously expected. There is uncertainty about what to expect in the mortgage space under the new Trump administration. In addition, the The Federal Reserve contributed to market volatility, indicating a slower pace of price reductions in 2025 than previously expected due to continued inflation.
By the end of December, loan rates were back up to 7%, while 30% of IMBs were still struggling to return to profitability as of the third quarter. Regarding M&As, some experts predict transaction levels in 2025 will remain similar to those in 2024.
“In September, when there was a refi capture, more than 50% of all that refi work was handled by the top 20 employees, out of 1,000 IMBs,” Ludden said. “I think it’s going to be a very difficult year for most lenders.”
Regarding M&A activity, Ludden noted that his pipeline at the end of 2024 is “pretty much the same in size, but different in structure” compared to the end of 2023.
“Historically, most of these deals have been structured as buyout deals, where you pay the owner to bring in his people rather than buy the company himself. However, more and more deals are now turning into stock purchase deals, which are a little more complicated,” Ludden added.
The purchase of assets may seem simple in theory because it does not involve a change in control, and the buyer avoids the debt of the past loan, which remains with the acquired company. But challenges arise when loan officers are reluctant to switch to a new company because of changes in compensation structures, product offerings and other factors.
M&A activity in 2025 is expected to grow to include companies that are not typically part of the mortgage space. Strategic partners are expected to seek a greater stake in lending companies, leveraging their expertise to improve efficiency, reduce costs and create value. Private equity firms are also likely to join the group, following their belief that the mortgage industry has bottomed out in the spring of 2024.
“One thing you will see in 2025, if market conditions hold, is M&A or sales of specialty non-QM platforms, driven by higher volume and stronger product bidding,” Fuller said.
Fuller explained that buyers include private equity firms, life insurance companies and organizations that already buy loans from founders who now want to “own the industry” to secure their desired volume. These specialized platforms usually do not focus on generating general or government loans. Instead, they focus on non-performing loans, investor loans and delete-service-coverage ratio (DSCR) loans.
M&A experts agree on one point: Valuation is likely to improve in 2025. Although mortgage rates remain high, they are expected to decrease compared to 2024, increasing the volume of loans and reducing the discount rate on future consumer cash flows – an important metric in the calculation. companies.
“Over the past 12 months, what has slowed down M&A activity is that sellers haven’t been able to get the prices they want,” Linger said. “But in social media, as the market develops, premiums are expected to rise again. Consumers will be willing to pay more to secure the same loan officers and compete for market share with their distributed franchises.
Industry executives are seeing more interest in wholesale and consumer-oriented channels, in addition to the retail channel. Employees are in a strong position, with sufficient capital and willingness to act as strategic partners.
In a recent interview with HousingWire, Dan Hanson, senior director of corporate relations and corporate acquisitions. loanDepot, he said the market could remain controlled by buying for at least another year or two.
“The important question is, can I be successful and make sure my family grows and survives in an environment where costs are rising and inventory is low?” said Hanson. “If you make 20 or 25 points as a small or large IMB owner, it’s not worth the risk. If you can’t make a reasonable profit out of the risk, it’s time to think about joining another company or selling your company. But you don’t want to be in a situation where you have to sell.
“At loanDepot, we decide whether our business will be relevant, increase productivity and add value to the organization we receive. It is also important that both sides agree that they have a really good chance of success.”
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