Jim Davis is editor of Scotsman Guide Residential Edition.
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Managing director, Transformational Mortgage Solutions
By Jim Davis
Les Parker, currently managing
director of Transformational Mortgage Solutions, served previously
as senior vice president of industry
relations and consulting at LoanLogics,
a technology and services provider.
Parker has executive mortgage
banking experience in capital markets,
servicing, operations, production and
financial management. His educational
background covers music, religious
studies, mortgage banking, mathematics and business administration.
Since the late 1980s, he has published
a daily newsletter connecting global
macroeconomics to U. S. interest rate
movement. Sign up for his newsletter
Mortgage-company consolidations are gaining steam
By his estimate, long-time mortgage executive Les Parker pegs the number of businesses that offer residential
mortgages in the U. S. at about 6,000. Throw out the smaller credit unions and community banks, and that number is closer to 500. Within that core, there are about 100 companies that would be considered major players in
the mortgage industry.
Expect those numbers to all shrink in coming years, however, Parker said. The former LoanLogics senior vice
president and now managing director of management-consulting company Transformational Mortgage Solutions, predicted earlier this year that the number of mortgage-company consolidations would boom in 2018.
He’s seen nothing so far that has changed his opinion.
You predicted this would be the biggest year for mortgage company consolidations since 1994. Has it been
what you have expected?
Yes, but it has come from a little different angle than I expected. I expected to see a significant increase in the
range of interest rates, and, a fancier way to describe that, is an increase of volatility. We have seen some short-term bursts of expansion of volatility, but what has really hurt the mortgage industry is the slightly higher rate
environment and, in anticipation of that, really squeezed margins. We’ve seen less production, and with less
production, those who thought they were going to expand their footprint have not been able to.
Why is that?
If you have 100 major participants in the marketplace, and they have capacity to handle a $2 trillion industry, and
the industry production is only $1.5 trillion, that’s off 25 percent. What do you do when you’re in business and
you’re competing against somebody else to get business? You end up shrinking margins. You’re trying to drop
prices. That’s what we’ve been seeing going on in the industry during 2017 and continuing into 2018.
Have you been surprised by any of the consolidations?
No. I knew there were some major players that were going to be entering the market and some major players exiting the market. For several years, there’s a been a trend toward the nonfinancial institutions, nonbank originators. They have really have been taking over the market. They were doing really well with their margins in 2015,
2016 and a little less in 2017. That made nonfinancials really think they could hang the moon. They thought they
would be able to expand their market share, but there wasn’t the commensurate total expansion of production. They created extra capacity, either through technology improvements or through adding bodies. … When
you’re not really seeing the numbers you expected, margins become smaller and that ends up leading to losses.
What pressures is that causing?
When you start seeing squeezes and losses, now you have to say who is going to acquire? How do you survive
if you’re losing money with each loan, or you’re not making enough money to really meet the returns of your
investors? Something has to give. What will give is you have to sell your company, or you have to sell your servicing. Or you say, “We’re just going to turn off the lights,” which also happened in California, where one major
originator and servicer just shut it all down, sold off everything.
Those pressures exist now in the industry everywhere. Who can come in and change the game? So, you have two
major players that can acquire, and it makes sense for them to acquire. That is nonfinancials that are well-capitalized
and that have scaled their compliance operations and back office. The other party is financial institutions. You could
have banks come into the game.
Any idea when it will end?
I’m not sure this time it’s going to be a cycle. The banking industry has had steady consolidation for decades.
For mortgage bankers, that’s not the case. It’s up and down, and there’s no real long-term pattern. I think we’re
getting ready to get into a long-term pattern for mortgage banking. I don’t know how steady it will be, but I
think it will be significant consolidation. I think the rapid consolidation will happen between now and 2021. The
reason I say that is I think most forecasters are predicting a recession in 2020 or 2021. … We are kind of headed
toward a slowdown and not just in the United States, but globally. If that happens, that just puts more pressure
on these independent mortgage brokers. n