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By Matthew Moosariparambil, Sara Laskoski
The housing market’s cool-down has been characterized by:
Low Volumes of Mortgage Origination — In its recent Mortgage Finance Forecast1, the Mortgage Bankers Association reported that total mortgage originations are down ~50% compared to 2021, and are not likely to rebound back to 2021 levels in either 2023 or 2024. Fannie Mae’s August Housing Forecast2 sends a similar signal with Single-Family Mortgage Originations down more than 50% compared to 2021 levels.
High Interest Rates Holding Steady — The Mortgage Bankers Association3 forecasts that interest rates in the 30-Year Fixed Rate Mortgage category will remain higher than 2021 levels through 2023. Mortgage interest rates reached 5.55% in August, the highest these rates have reached since May 2019.4
Ongoing Layoffs — In 2020 and 2021, mortgage lenders increased staffing in response to the Federal Reserve slashing interest rates during the pandemic. Now confronted by rising interest rates and dropping mortgage origination volume, thousands of industry employees have been laid off by mortgage lenders5 both large and small. Certain mortgage lenders have attempted to redeploy staff to other parts of their businesses, but dampened housing activity of this severity has made layoffs across the industry unavoidable
Increased Impact on Non-Bank Lenders — The decrease in housing activity, while challenging to the financial services industry broadly, impacts non-bank institutions more deeply and with potentially more longstanding effects. Non-bank lenders have less diversified service offering portfolios compared to their bank counterparts, which makes non-bank lenders more vulnerable to fluctuating interest rates. When interest rates rise, first-time buyers are typically the first demographic to be deterred from the housing market6 – a demographic that non-banks are more likely to attract and serve. Additionally, non-banks tend to focus on refinanced mortgages, which are expected to continue falling through the end of the year and beyond.
Too many mortgage lenders are battling it out for too few loans to support the industry at its current size. We are witnessing mortgage lenders as they react to this reality and right-size themselves to the extent possible. Unfortunately, this is not a simple process, or even a possibility for all lenders, if the recent increase in distressed activity is any indication. Within the past three months alone7:
Amid economic uncertainty and the housing market cool-down, there are financial institutions that do stand to benefit. Historically, periods of market downturn have provided effective growth strategies for institutions leveraging M&A. Mergers or acquisitions between mortgage lenders can be done with greater advantages for both buyers and sellers than possible during the past few years. Such deals can be opportunities for growth for buyers, and opportunities to receive cash flow and maintain operations for sellers. Interested and eager institutions have already noticed the opportune timing for acquisitions and have announced deals such as:
Financial institutions looking to take advantage of the down market through acquisition should not lose sight of potential risks, particularly in transactions containing distressed assets. As with any M&A activity, the many parties involved (creditors, other bidders, etc.) may create timing obstacles, difficulties in sharing information, and due diligence complexity.
It is important to have a clearly defined and effective M&A strategy, or playbook, when pursuing M&A opportunities. Following an M&A playbook can help parties maximize synergy potential, use data-driven principles, synchronize operating models, and mobilize resources effectively to manage integration.
Matthew Moosariparambil, Partner
Guidehouse is a global consultancy providing advisory, digital, and managed services to the commercial and public sectors. Purpose-built to serve the national security, financial services, healthcare, energy, and infrastructure industries, the firm collaborates with leaders to outwit complexity and achieve transformational changes that meaningfully shape the future.