If you are a lender, real estate agent, or anyone in the financial services sector, chances are you have noticed an uptick in the deal flow as of late. Whether due to the new presidential administration, individuals growing weary of their business, or previously unseen business expansion opportunities, there is a steady stream of mergers and acquisitions. Recent deal announcements include retail player Union Home Mortgage (UHM) buying Nations Reliable Lending (NRL), Rocket buying Redfin, and A&D Mortgage making a big move in TPO with the purchase the Mr. Cooper wholesale unit. The question you might be asking is: what do these companies hope to gain, and what does this mean for me?
Garth Graham and the M&A team at STRATMOR have their eye on trends in the mortgage industry. In some cases, parties may have different perceptions of how much the market may change based on fluctuations in mortgage rates that drive refinance volume. This ‘incremental’ change may bump up volume like we saw in September, but as Garth said, “Refinances don’t necessarily spread like peanut butter.” They are not equal for all originators. And is it prudent to forecast a big increase in refinances for any lender in this crazy climate? This has certainly made different lenders consider their options, and the recent deals reflect a few of those considerations.
The easiest deal to digest is Union Home Mortgage’s ($8B) purchase of Nation’s Reliable Lending ($1B). This is an example of a big origination acquiring a smaller one, leveraging their investment in product, technology and servicing to acquire new markets and more production. There have been dozens of these types of transactions in the last year and according to Garth “there are likely many more to come.”
The Rocket-Redfin deal is arguably more important for the market. It’s a big headline because it takes a top lender and a top real estate firm and puts them together. Rocket Companies has many small entities that make up the corporation, with the mortgage company being the most well-known. Does Rocket buying a real estate services company, while owning a mortgage company, represent a sea change? Rocket may be keenly interested in engaging with people earlier in their home buying journey and focusing on being better in the purchase market. Few large companies have a local touch, but this may be Rocket’s attempt to do that in striving for the ultimate direct-to-consumer (DTC) strategy.
Financial sector companies have a wide variety of models. And models can co-exist, with each being successful. For example, look at tax preparation, with TurboTax, HR Block, and a large number of accounting firms all offering similar products. Some originators and lenders heard the Rocket-Redfin news with dismay. Others, however, viewed it as added motivation for LOs and brokers to take another look at their target market, encourage a partnership with their own local agents, and to work smarter.
On a larger scale, given changes in the real estate brokerage sector, larger companies (like Rocket) are seeing how inexpensive top real estate brokers are in this market with last year’s NAR settlement and all of the current lawsuits. Which brings us to the A&D deal – this is a company that has been operating and succeeding in the non-QM niche, hitting roughly $3B a year in non-QM production through brokers. They have built proprietary tech and an interesting array of products and services. The wholesale origination unit from Flagstar ($7B last year) has been known for proprietary tech and a broad conforming and government lending mix for decades. Combining these two creates an interesting one-stop shop for brokers in addition to the ‘Big 2’ of UWM and Rocket.
Convenience, however, comes with a price. Will $1.75 billion streamline the homebuying process by integrating mortgage services with real estate transactions, offering a seamless process from pre-approval to closing? A cohort of home buyers will gravitate toward a high-tech home buying experience, of course, but there is universal recognition that there will always be a need for some type of advisor, at least in terms of the education process: it will never go away.
In the bank arena, as of this writing, there is some turmoil as the FDIC has proposed rescinding the agency’s 2024 Statement of Policy on Bank Merger Transactions. It makes one wonder what “final” really means. FDIC officials said at the time of issuance that the Statement of Policy addresses the scope of transactions that will be reviewed, the process for that review and whether a proposed deal follows the standards established in the Bank Merger Act. Some banking groups, including the American Bankers Association, had previously questioned the board’s September Statement of Policy, saying that it did not provide the predictability and transparency needed in the process. The groups also said the proposal did not provide for more timely approvals of proposed mergers. Law firm Ballard Spahr opines, “As a result, the FDIC reinstating, on an interim basis, the Merger Statement that was in effect before 2024, which had long existed in setting regulatory expectations. In order to conduct its contemplated broader review, the agency is also seeking public comment on returning to that statement on a longer-term basis.”
A merger or acquisition, whether involving a bank, mortgage bank, vendor, or real estate brokerage, doesn’t guarantee success. One key factor that has gained more attention, thanks to STRATMOR’s research, and has often been a challenge in achieving the best outcomes in past deals, is company culture. Is a lender or bank merging with another lender or bank that they’ve been competing with for decades? Are the cultural elements a good fit? Is it a good long-term marriage or a marriage of convenience that is bound for trouble?
Independent lenders and banks may have differences from others in operating structure, hierarchy, dictatorial management versus more open styles, pay structures and other factors. Here too, candidates should evaluate things very carefully before jumping into the pool, if success is to be truly achieved over the short and long term.
There is also the issue of staffing. This will be a question that the Rocket-Redfin deal will grapple with since Redfin owns Bay Equity Home Loans. The operations staff of Bay Equity have been prompted to stay until the deal closes. But, in general, what percentage of each institution is support staff? There are challenges at the higher echelon levels, too, as there will be duplication of positions. There will be multiple CEOs, heads of production, CIOs, capital markets, CFOs, etc. who have to be sifted, which will entail a lot of pain as some may have to leave. Departments have to be realigned or closed. The private sector is ruthless and the higher pay scales carry an unemployment trade-off as they use euphemisms such as shareholder value for downsizing. If one of the biggest benefits of an M&A deal is combining staff, or acquiring talented individuals, failing to lock in key personnel through contracts before a deal is announced can result in the loss of some of the very people that made a deal attractive.
The timing of M&A deals is tricky, and Garth mentioned that the time it takes to get a deal done can vary widely depending on the complexity and emotions involved and the speed at which the parties engage. “Of the last dozen deals STRATMOR has done, the timing has ranged from two months from start to finish, to over one year to get the deal closed. Asset sales are faster, while stock sales take longer, so it depends on the needs of the buyers and sellers and what works best. But I warn potential sellers not to WAIT too long to engage in the process, even if you hold on pulling the trigger. For example, we have deals in process where the parties have worked together for months (getting to know each other, sharing financials) and now are finalizing terms.”
“We are super careful about the NDA and non-solicitation process, and also with ensuring that the potential buyer signs a blind NDA before they know the seller’s name. We try to do a lot of financial due diligence in advance, so the buyers and sellers go into the process with a full understanding of the financial synergies. After all, there are a lot of potential savings in back office and corporate expenses for the right acquisitions, so a detailed analysis of those expenses is key to be done BEFORE the offer is made, not wait until due diligence.”
“STRATMOR did multiple deals in 2024, and all had upfront premiums with solid earn out. Often the premium being paid is driven by the ability of the seller to add the production without having to add all the corporate expense, so decisions about the corporate departments (secondary, HR, risk, technology, etc.) can be painful, but the end result is that the production is worth more to the buyer than it is to the seller due to the cost savings. And that shows up on premium offers. And the seller gets the balance sheet plus a share of that financial benefit. So, it can be a potential win-win.” Rob Chrisman
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