Uncertainty in the future of mortgage finance drives M&A activity

Greatest challenge to middle-age companies: HMDA

Crystal ball

The Mortgage Bankers Association recently predicted that mergers and acquisitions will heat up over the next two years.

And now, the increasing uncertainty about the future of Dodd-Frank and the Consumer Financial Protection Bureau is driving some lenders to sell-out, according to one expert in our space.

“It’s hard to buy new technology to mitigate risk for your company without some specificity, without some clarity on the direction of where we’re going,” Menlo Managing Director Rick Roque said in an interview with HousingWire.

“So whether it’s more enforcement or less enforcement or more regulations or less regulations, this back and forth is what creates the uncertainty and the ambiguity, without a clear plan,” Roque said. “It’s that uncertainty that causes owners who are at the sunset of their career to investigate good offers and good options for the company.”

Roque explained the majority of the industry is nearing the last ten years of their career, and that lenders are selling their companies because there is no one to replace them.

“There isn’t a new wave of young mortgage bankers who own their own company, who wants to start their own company,” he said.

In fact, at the MBA’s recent mortgage servicing conference in Grapevine, one expert pointed out the lack of younger generations in the industry.

And for now, the rising cost of compliance is enough to drive mid-sized companies to merge. As Roque points out, even if regulation is cut, it could take years to take effect.

“Even though there’s a question around the CFPB that does not mean that the future of regulation necessarily is going away anytime soon,” he said. “It might very well take a couple of years to reform the CFPB, even from the time that they make any proposals to adjust the CFPB and how it enforces the rules and regulations – it could take two or three years to implement.”

“If anything there are indications that the enforcement mechanism of Dodd-Frank will just transition away from the CFPB into the states,” Roque said.

But even if Dodd-Frank is reformed, which President Donald Trump’s administration continues to claim is a top priority, the greatest risk actually comes from the Home Mortgage Disclosure Act.

“And the other piece, I would say, is the most important piece, regardless of the existence of the CFPB, is HMDA,” Roque said. “The cost of the data points on every application exposes lenders to a tremendous amount of risk.”

“And small to mid-sized firms don’t have the capital, they don’t have the talent and they don’t have enough invested in the technology to protect their company from allegations that they’re violating fair lending,” he said. “As a result, that’s another big reason why small to midsized firms are looking to be acquired. They’re looking for outside capital.”

What’s more, during the Ellie Mae Experience conference in Las Vegas, experts explained HMDA reporting is about to get much more complicated.

And these rising uncertainties are exactly what are driving the merger and acquisition market, which Roque explained will only continue to expand in 2017.

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