How will mergers and acquisitions in the field of mortgages develop in 2025?

David Neylan, president and chief operating officer at retail lender Guild Mortgageexpects the landscape to remain challenging for mortgage companies in 2025. But Neylan plans to respond to these challenges.

“I know there are predictions that interest rates will fall, but it is not as much as anyone had hoped or expected. And this ‘higher and longer’ trend will cause continued pressure on profitability, especially for companies that lack scale and scope,” Neylan said.

Guild posted volume of $6.9 billion in the third quarter of 2024, as it reported profitability in its origination segment – ​​even with a total loss of $67 million due to a change in market value in its servicing portfolio. With this financial backdrop, the company plans to continue acquiring other companies to gain market share and improve its product offering by 2025.

The pipeline of potential acquisitions was “pretty strong,” Neylan said. “I would say things have slowed down a bit over the summer and early fall, but now that we realize rates are still high, it’s definitely a bit busier now.”

In February 2024, Guild struck a deal to acquire the retail lending rival Academy Mortgage Corp.which adds 20% to 25% more volume, 1,000 employees and approximately 200 locations. It was the company’s biggest deal in the past 12 months, although there was a delay from 2023, when Guild acquired the company. Legacy Mortgage in February, Cherry Creek Mortgage in March and First hundred-year mortgage in August.

Like Guild, the entire mortgage industry slowed the pace of mergers and acquisitions in 2024. HousingWire tracked 37 mergers, acquisitions, exits and bankruptcies involving originators, servicers, technology platforms and appraisal and valuation companies. This represents a sharp decrease compared to the 62 transactions reported in 2023.

In 2024, mergers and acquisitions accounted for 76% of the total, followed by exits at 22% and bankruptcies at 2%. But there is a caveat, as HousingWire’s reporting likely represents only a fraction of actual activity in 2024. Many deals go unpublished due to the private ownership of most mortgage companies.

“2024 was expected to be the year for a reversal, with interest rates expected to fall, so we expected M&A activity to slow down,” said Brett Ludden, managing partner at Sterling Point Advisors. “As lenders start making money again, the expectation is that fewer of them will be interested in a transaction or need to consider it as a strategic tool.”

After two years of losses, independent building societies (IMBs) as a group returned to profitability in the second quarter of 2024, with 78% of them reporting profits. The 30-year conforming mortgage rate, which rose to about 7.6% in May, fell to 6.2% in September due to an easing monetary policy cycle, according to HousingWire’s Mortgage Rates Center.

“I don’t think many smaller companies have found themselves in a position where they have been forced to sell or forced to sell as they were expected to,” said Jennifer Fuller, managing director at Houlihan Lokey‘s financial services group. “Those companies had more money and more alternatives to continue as independent companies, rather than selling for what would not have been a meaningful premium to book.”

Sellers were mainly companies that struggled to become profitable. Among the profitable companies, some founders chose to sell because they were dissatisfied with the return on their investment.

Buyers, on the other hand, were often companies looking to expand their product offerings or increase their market share in specific regions of the country. Servicers also joined the M&A activity, focusing on building their mortgage servicing rights (MSR) portfolios to capture recapture opportunities when rates eventually fall. Scale was the driving force behind many transactions.

According to Michael Linger, senior vice president of Houlihan Lokey’s financial services group, “Some companies still had the option to divest MSRs they had retained between 2021 and 2022. However, if you are still selling MSRs this year, you are probably close to the last parts of that portfolio and depending on 2025, this will be a better year.”

What can you expect in 2025

The outlook for 2025 appears less optimistic than previously expected. There is uncertainty about what we can expect in the mortgage space under the new Trump administration. Moreover, the Federal Reserve has contributed to market volatility, pointing to a slower pace of rate cuts in 2025 than previously expected due to persistent inflation.

At the end of December, mortgage rates again approached the 7% level, while 30% of IMBs were still struggling to return to profitability as of the third quarter. In terms of mergers and acquisitions, some experts predict that transaction levels in 2025 will remain similar to those in 2024.

“In September, when there was some refinancing, more than 50% of all that incremental refinancing activity was captured by the top 20 servicers, out of 1,000 IMBs,” Ludden said. “I think it will continue to be a relatively difficult year for the majority of lenders.”

In terms of M&A activity, Ludden noted that its pipeline at the end of 2024 is “probably very similar in size, but different in composition” compared to the end of 2023.

“Historically, most of these transactions have been structured as asset purchase deals, where you pay the owner to transfer their people rather than buying the company itself. However, more and more deals are now becoming share purchase deals, which are slightly more complex,” says Ludden.

Asset purchases may seem simpler in theory because they involve no change in control and the buyer avoids liability for past loans, which remains with the acquired company. But problems arise when loan officers are reluctant to move to the new company because of changes in compensation structures, product offerings and other factors.

By 2025, M&A activity is expected to expand to companies that are not traditionally part of the mortgage industry. Strategic partners are expected to pursue majority stakes in mortgage companies and use their expertise to improve efficiency, reduce costs and create value. It is likely that private equity firms will also join this group as they believe the mortgage industry will bottom out in the spring of 2024.

“One thing you will certainly see in 2025, if market conditions persist, is mergers and acquisitions or sales of specialized non-QM origination platforms, driven by higher volume and strong bidding for the product,” Fuller said.

Fuller explained that buyers include private equity firms, life insurance companies and entities already purchasing loans from originators who now want to “own the factory” to guarantee the desired volume. These specialized platforms generally do not focus on the production of conventional loans or government loans. Instead, they specialize in non-qualified mortgages, investor loans, and DSCR (Debt Service Coverage Ratio) loans.

M&A experts agree on one point: valuations are likely to improve in 2025. While mortgage rates remain high, they are expected to decline compared to 2024, increasing lending volume and reducing the discount rate on buyers’ future cash flows – a key metric in loan valuation. companies.

“What has slowed M&A activity somewhat over the past 12 months is that sellers have not achieved the valuations they were looking for,” Linger said. “But for retail platforms, premiums are expected to rise again as the market improves. Buyers will be willing to pay more to secure the same loan officers and compete for the market share that distributed retail franchises represent.”

Industry executives are seeing increasing interest in the wholesale and consumer channels, in addition to the retail channel. Servicers are in a strong position, with sufficient capital and the willingness to act as strategic partners.

In a recent interview with HousingWire, Dan Hanson, executive director of enterprise partnerships and acquisitions at loanDepot, said the market could remain purchase-driven for at least another year or two.

“The key question is: Can I succeed and ensure my family grows and survives in an environment where costs are rising and supplies are falling?” Hanson said. “If you, as the owner of a small or large IMB, earn 20 or 25 basis points, it is not worth the risk. If you can’t make a reasonable profit for the risk, it’s time to think about joining another company or selling your business. But you don’t want to find yourself in a position where you have to sell.

“At LoanDepot we determine whether our company will complement the organization we are acquiring, increase productivity and add value. It is also important that both parties agree that they have a very good chance of success.”