Sink or Swim?
The Big Decision Facing Many Independent Mortgage Bankers
by Michael Wallace
According to recent statistics released by the Mortgage Bankers Association of America, only 29 percent of mortgage banking firms reported a pre-tax net financial profit in the fourth quarter of 2023, with the average pre-tax production loss being 73 basis points per loan. The firms showing a profit largely relied on servicing income or the sale of mortgage servicing rights.
We have seen numerous cycles in the mortgage business before, but this one is different. Unlike in 2008 during the financial crisis and in 2020 during the pandemic, government intervention to sustain the housing and mortgage market is highly unlikely. The Fed has committed to keeping inflation in check, so there will be no significant reduction in interest rates this year. Consequently, housing supply will remain low, and there won’t be a significant increase in the number of mortgage originations. The bad news is that it will be difficult to be profitable as a mortgage originator this year.
Years ago, as CEO of an Independent Mortgage Banker in New York, I remember that many of the greatest opportunities for growth came during significant disruptions in the business. We started and grew our company primarily by hiring and training our own loan officers, as recruiting is not an easy process, especially when times are good. It was during difficult times that the best opportunities to pick up talented individuals in all areas of the business presented themselves. Companies that resisted change often went out of business, leaving the survivors stronger as a result. After we sold the company and I left the business for a while, I always kept a pulse on the industry, and this trend continued. During the financial crisis, my former partner and his new partners merged their companies and emerged from the crisis stronger than before. Many of those that didn’t explore strategic alternatives such as a merger or sale of their company didn’t make it.
Currently, I have a number of mid to large-sized mortgage bankers actively looking for opportunities to expand their origination business. Many of the small to mid-sized firms I have spoken to are reluctant to sell or consider alternatives. Some that are interested have unrealistic expectations. I have always found that one of the best ways to determine if a business deal is fair is to have each party come up with a proposal that they would be willing to accept if they were on the other side of the transaction. As someone who has sold a few different businesses, I can tell you that no one always gets everything they want. Fairness and compromise are part of every deal that works. This is the key to success because, in most cases, the parties will continue to have a working relationship after a merger or acquisition is completed.
We all have inflection points in our lives. This is also true in business. Do you want to wait it out, hoping things turn around and your business becomes profitable again? Or do you want to test the waters and seriously consider other options that may provide your greatest opportunities? It’s time to start swimming.
Michael Wallace is a Mortgage Banking Consultant who provides advisory services to Mortgage Banks, Warehouse Lenders, and offers potential merger and acquisition opportunities. mjwallace@wallacerealestatesolutions.com.
