David Neylan, president and chief operating officer at retail lender Guild Mortgage, expects the landscape to remain challenging for mortgage companies in 2025. But Neylan plans to capitalize on these challenges.
“I know there’s some forecasts for rates to drop, but it’s not as much as everybody had been hoping or anticipating. And this ‘higher-for-longer’ trend is going to cause continued pressure on profitability, particularly for companies that lack scale and size,” Neylan said.
Guild posted $6.9 billion in origination volume in the third quarter of 2024, when it reported profitability in its origination segment — even with an overall loss of $67 million due to a market value change in its servicing book. With this financial background, it aims to continue acquiring other companies to gain market share and enhance its product offerings in 2025.
The pipeline of potential acquisitions has been “pretty strong,” Neylan said. “I would say it slowed down a little bit in the summer and early fall, but with the realization that rates are still elevated, it’s certainly a little busier now.”
In February 2024, Guild struck a deal to acquire retail lending rival Academy Mortgage Corp., adding 20% to 25% more volume, 1,000 employees and approximately 200 branches. It was the company’s largest deal in the past 12 months, although it marked a slowdown compared to 2023, when Guild acquired Legacy Mortgage in February, Cherry Creek Mortgage in March and First Centennial Mortgage in August.
Like Guild, the entire mortgage sector reduced its pace of M&A activity in 2024. HousingWire tracked 37 mergers, acquisitions, exits and bankruptcies involving originators, servicers, tech platforms, and appraisal and valuation companies. This marks a steep decline compared to the 62 transactions reported in 2023.
In 2024, M&A deals accounted for 76% of the total, followed by exits at 22% and bankruptcies at 2%. But there is a caveat as HousingWire’s reporting likely represents only a fraction of the actual activity in 2024. Many deals are not publicized due to the private ownership of most mortgage companies.
“2024 was going to be the year for a turnaround, when rates were expected to start coming down, so we would have anticipated M&A to start to decline,” said Brett Ludden, managing partner at Sterling Point Advisors. “As lenders start to make money again, the expectation is that fewer of them would be interested in or need to consider a transaction as a strategic tool.”
In fact, after two years of losses, independent mortgage banks (IMBs) as a group returned to profitability in the second quarter of 2024, with 78% of them reporting a profit. The 30-year conforming mortgage rate, which climbed to about 7.6% in May, declined to 6.2% in September due to an easing monetary policy cycle, according to HousingWire’s Mortgage Rates Center.
“I don’t think a lot of smaller firms were put into a position where they were forced to sell or compelled to sell like they were expected to,” said Jennifer Fuller, managing director at Houlihan Lokey‘s financial services group. “Those firms had more cash and more alternatives to continue as independent companies, rather than selling for what would not have been a meaningful premium to book.”
Sellers were primarily companies that struggled to achieve profitability. Among the profitable ones, some founders chose to sell because they were dissatisfied with their returns on investment.
Buyers, on the other hand, were often companies aiming to expand their product offerings or improve their market share in specific regions of the country. Servicers also joined the M&A activity, focusing on building their mortgage servicing rights (MSR) portfolios to leverage recapture opportunities when rates eventually drop. Scale was the driving force behind many transactions.
According to Michael Linger, senior vice president of Houlihan Lokey’s financial services group, “some companies still had the option of divesting MSRs they had retained from 2021 to 2022. However, if you’re still selling MSRs this year, you’re probably nearing the latter parts of that portfolio and depending on 2025 to be a better year.”
What to expect in 2025
The outlook for 2025 appears less optimistic than previously anticipated. There is uncertainty about what to expect in the mortgage space under the new Trump administration. Additionally, the Federal Reserve has contributed to market volatility, signaling a slower pace for rate cuts in 2025 than previously expected due to persistent inflation.
By late December, mortgage rates were once again nearing the 7% level, while 30% of IMBs were still struggling to return to profitability as of the third quarter. Regarding M&As, some experts predict transaction levels in 2025 will remain similar to those in 2024.
“In September, when there was some refi pickup, over 50% of all that incremental refinance activity was captured by the top 20 servicers, out of 1,000 IMBs,” Ludden said. “I think it’s going to remain a relatively tough year for the bulk of lenders.”
As for M&A activity, Ludden noted that his pipeline at the end of 2024 “is probably very similar in size, but it’s different in makeup” compared to the end of 2023.
“Historically, most of these transactions have been structured as asset purchase deals, where you’re paying the owner to bring over their people rather than buying the company itself. However, more and more deals are now becoming stock purchase deals, which are a bit more complex,” Ludden added.
Asset purchases may seem simpler in theory because they do not involve a change in control, and the buyer avoids liability for past loans, which remains with the acquired company. But challenges arise when loan officers are reluctant to transition to the new company due to changes in compensation structures, product offerings and other factors.
M&A activity in 2025 is expected to expand to include companies that are not traditionally part of the mortgage space. Strategic partners are anticipated to seek majority stakes in mortgage companies, leveraging their expertise to improve efficiency, reduce costs and create value. Private equity firms are also likely to join this group, following their belief that the mortgage industry hit bottom in the spring of 2024.
“One thing you will definitely see in 2025, if market conditions hold, is M&A or sales of specialized non-QM origination platforms, driven by higher volume and a strong bid for the product,” Fuller said.
Fuller explained that buyers include private equity firms, life insurance companies and entities already purchasing loans from originators that now want to “own the factory” to ensure their desired volume. These specialized platforms typically do not focus on conventional or government loan production. Instead, they specialize in nonqualified mortgages, investor loans and debt-service-coverage ratio (DSCR) loans.
M&A experts agree on one point: Valuations are likely to improve in 2025. Although mortgage rates remain high, they are expected to decline compared to 2024, boosting loan volume and reducing the discount rate on buyers’ future cash flows — a key metric in valuing companies.
“Over the past 12 months, what has slowed M&A activity somewhat is that sellers haven’t been achieving the valuations they’re looking for,” Linger said. “But for retail platforms, as the market improves, premiums are expected to rise again. Buyers will be willing to pay more to secure the same loan officers and compete for the market share those distributed retail franchises represent.”
Industry executives are observing increased interest in the wholesale and consumer-direct channels, in addition to the retail channel. Servicers are in a strong position, with ample capital and a willingness to act as strategic partners.
In a recent interview with HousingWire, Dan Hanson, the executive director of enterprise partnerships and acquisitions at loanDepot, said the market could remain purchase-driven for at least another year or two.
“The pivotal question is, can I succeed and make sure my family grows and survives in an environment where costs are going up and inventory is down?“ Hanson said. “If you’re making 20 or 25 basis points as an owner of a small or large IMB, it’s not worth the risk. If you can’t make a reasonable profit for the risk, it’s time to think about joining another firm or selling your company. But you don’t want to be in a position where you have to sell.
“At loanDepot, we’re determining whether our business will complement, increase productivity and add value to the organization we’re acquiring. It’s also important that both parties agree they have a really good chance for success.”
