No business likes to lose money. That’s why it was eye opening when the Mortgage Brokers Association released their latest Annual Mortgage Banker Performance Report that showed, on average, lenders lost $301 dollars on every loan that they originated. This number was down from $2,339 in 2021 and was the first time that net production income was negative since the organization started compiling the report in 2008.
These net losses come from a sharp drop in the volume of loans. Loan originators have been reducing staff to reflect the reduction in business, but were not able to do it fast enough. Mortgage companies will surely be continuing to reduce headcount but we will probably also see a number of consolidations. Industries that see dropping profitability are often followed by consolidations as larger organizations can use their economies of scale to reduce costs for things like accounting and admin. Some industry experts predict that up to 30 percent of the 1,000 largest mortgage banks will either merge or disappear.
Generally, when consolidations happen, the largest companies acquire the smaller ones, but that might not be the case thanks to the current mortgage landscape. If we are looking at residential mortgages the top two companies, Rocket Mortgage and United Wholesale Financial are both more than twice the size of the third, LoanDepot.com.
Rocket Mortgages is an internet based mortgage company, so it is unlikely that it will want to buy up another lender and inherit all of their branches (which it likely sees as liabilities more than assets). Rocket, which also has an auto lending business, and has been positioning itself as a full-fledged financial services provider. The one company that Rocket has acquired is Truebill, a personal finance app, for $1.2 billion in 2021.
United Wholesale Financial is also not in a position to go on a buying spree. The company went public via SPAC (back when those were all the rage) at $16 billion, which at the time was the largest blank check merger in history. A class action lawsuit was filed against the owners for the exorbitant price point that investors say was created thanks to inflated projections. The stock is now less than half of what it went public for, shrinking the company’s market cap to $8.3 billion, and pulling them out of contention for a major consolidation player.
Rounding out the list of the top mortgage lenders are many of the country’s largest banks including Wells Fargo, Bank of America, and JPMorgan Chase, which are of course subject to a ton of scrutiny and not able to make acquisitions without the scrutiny of regulators. So if we are not going to see big lenders buying up the little guys, then that leaves the little guys to merge with each other. There are a ton of smaller mortgage lenders, all with very similar loan portfolios and nearly identical services. One of these mergers has already taken place, in February American Portfolio Management merged with Town Square Mortgage creating a company with 36 state licenses, 35 branches, and 200 active loan officers.
The same fate may also befall commercial lenders. Most of the top commercial lenders are either large banks or service providers like CBRE and JLL. Since the consolidation of these large institutions is unlikely, we will probably see the smaller companies merge to help them compete. Less competition usually means higher prices, so this might continue to drag down the lending outlook for borrowers but since many of these companies face a risk of failure without consolidation, the industry might be better off this way.
There is an upcoming wave of refinancing that will need to happen as short term loans taken out during the pandemic come due. This wave could revive the mortgage industry if those loans get refinanced but also poses a risk. If borrowers are not able to afford their new, higher rate loans, it could cause a mass foreclosure that would force even more to consolidate or close their doors. For the health of the property industry, we should all be rooting for the former.
Here is a map of the most popular mortgage lenders in each state. As you can see, the less populous states often rely on the smaller lenders while larger, denser ones are generally dominated by the larger companies.
What we are reading
Sure there might be some problems in the office sector but other sectors like industrial, multifamily, and retail seem to be doing well. Plus, “about three-fourths of commercial real estate debt generates enough income to pass banks’ recent refinancing standards without major changes.”
Size of the boat
A JLL report shows that even though companies are shrinking their office footprints, they are gravitating to better, more expensive spaces.
At will return
Many companies are mandating a return to the office but others are finding success in providing workers with a “destination” that can appeal to the different types of anti-office personas.