Consolidation of the U.S. Mortgage Industry: M&A Activity Seen Rising in Light of Competition, Regulatory Challenges

U.S. Mortgage Industry | GoRIon Blog

Faced with stagnating loan volumes and growing competition from non-bank lenders, the U.S. mortgage industry is struggling to expand its footprint.

Although banks have largely sat out the surge in M&A activity of the last few years, consolidation is increasingly viewed as the golden ticket to future growth in an industry facing higher capital requirements and rising costs.

The global financial crisis brought about significant change for the traditional banking sector. Faced with regulatory and competitive pressures and a prolonged period of record low interest rates, banks have struggled for profits. Though change appears to be afoot in the form of major regulatory overhaul, mergers and acquisitions (M&As) are increasingly viewed as the golden ticket to future growth.

Consolidation of the U.S. mortgage industry is expected to accelerate in coming years as market participants look to stay competitive in the face of growing uncertainty. Banks made up just 3% of total M&A activity in 2016, despite accounting for more than 9% of total market capitalization.[1] However, a closer look at the numbers reveals that consolidation of the mortgage space is already under way.

M&As have seen a large upswing in recent years, with deal activity including various mortgage and MSR portfolios, as well as mortgage origination, servicing and refinancing businesses. Data from Ernst & Young show that a total of 66 mortgage-related M&A deals were completed in 2014, followed by 51 in 2015. A further 33 deals were completed through the first nine month of 2016.[2]  

M&A convergence is expected to intensify as businesses brace for a major regulatory rollback under the Trump administration. President Trump has vowed to unwind the Dodd-Frank Wall Street Reform and Consumer Protection Act – a process that began in March with an executive order initiating a review of the Obama administration’s landmark legislation. The presidential review is intended to evaluate the federal financial regulatory agencies that administer Dodd-Frank, including the Federal Reserve and Securities and Exchange Commission (SEC).[3]

A regulatory overhaul would not only require mortgage lenders to once again boost their processes and systems, it will also force them to increase their adoption of emerging technologies. After all, a major part of President Trump’s plan is to strengthen the economy and boost jobs and incomes, thus leading to healthier borrowers.[4] As recent trends have shown, many of these borrowers prefer digital mortgage solutions. In fact, fintech mortgage lenders are driving much of the growth in the industry. In the process, large banks have seen their share of the mortgage market cut in half from 50% to 24% since the financial crisis.

Fintech presents a tremendous opportunity to cut costs, but going at it alone requires high capital expenditure and bears the risk of failure. Strategic acquisitions of fintech companies could be a more desirable option. These sorts of deals certainly haven’t been out of the ordinary; Ernst & Young rightly note that the bulk of the mortgage M&As over the last three years were strategic acquisitions of small- and medium-sized mortgage lenders.

Of course, fintech is only one area where consolidation could occur. High regulatory costs stemming from new lending and serving requirements will continue to push smaller businesses into the embrace of larger companies with the capability of achieving greater economies of scale.[5] Industry watchers should therefore expect small and midsize market players to be subject to takeover speculation for the foreseeable future.   

[1] Doug Stotz, Arjun Saxena and Sanchit Tiwari (March 4, 2016). “Why the Banking Industry Needs $600 Billion Worth of M&A.” Strategy+Business.

[2] Ernst & Young (November 2016). “US mortgage banking: M&A trends and outlook.”

[3] Aaron Klein (March 20, 2017). “Trump’s executive order on Dodd-Frank.” The Brookings Institution.

[4] Patrick Barnard (January 21, 2017). “Rick Glass: Expect Some Consolidation In The Mortgage Industry In 2017.”

[5] Ernst & Young (November 2016). “US mortgage banking: M&A trends and outlook.”

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This article has been exclusively written for GoRion by...

Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

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