EXCLUSIVE: STRATMOR explains increase in mergers and acquisitions

Sellers leave mortgage industry due to personal exit strategies

Recently, the Mortgage Bankers Association talked about how mergers and acquisitions are heating up, however STRATMOR, which has an active M&A practice with a focus on midsize Independent mortgage banks, is quick to add that they wouldn't characterise the markets as getting hot, yet.

The MBA recently stated that acquisitions are on the rise for lenders as they struggle to manage the increase in costs to originate a loan, according to MBA Chief Economist Mike Fratantoni.

In fact, industry sources say that RPM Mortgage, an independently owned and operated residential mortgage lender, is rumored to be buying American Financial Network, a mortgage banking firm serving the lending needs of real estate professionals, builders, and individual homebuyers.

STRATMOR, on the other hand, holds a different point of view on the same subject.

“Heating up is a relative term,” STRATMOR Senior Partner Jeff Babcock said in an email to HousingWire. “We are seeing higher levels of M&A activity year-to-date in 2016 than previous years, but we wouldn’t necessarily characterize it as a hot market.”

While it may not see it as a hot market, the company does have its views about the reason for the increase in mergers and acquisitions this year. Babcock summed up these reasons in two points.

1. Buyers

Right now, buyers are seeking to expand their production scale in order to realize potential economies and target geographic gaps in their markets.

2. Sellers

Meanwhile, sellers are driven by owner/operator age considerations, personal exit strategies, a highly favorable seller’s market for quality lenders with a critical mass of production, potential for a competitive bidding situation and a desire to offload some of the management functions which they perceive as distractions. Some of these include compliance, LOS optimization and warehouse line administration.

STRATMOR emphasized that many sellers are leaving the industry due to personal exit strategies. Why?

The average age of loan officers and branch managers is 46 years old, according to STRATMOR’s annual Originator Census survey. What's more, owner-operators tend to be generally seven to 10 years older, on average.

“Since selling one’s mortgage company is a typically a multi-year process, earn outs have been a three-year duration in virtually every sale transaction closed over the last five years, we don’t think it’s a coincidence the age of one or more shareholders is a driving factor for the vast majority of sellers in STRATMOR’s recent and current deal pipelines,” Babcock said.

“We are not implying that other economic, regulatory and strategic factors are absent, but it seems pretty clear to us that age considerations appear to trump all other sale motivators,” he said.

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