As we begin 2006, it's appropriate to step back and review merger and acquisition (M & A) activity within the mortgage banking industry in 2005. This column looks at some of the more prominent deals of 2005 and the potential implications for future deal activity.
Within mortgage banking, the deal pace in 2005 lagged behind 2004 in terms of the number of deals and aggregate value. There were 31 deals announced in 2005 (see Figure 1), compared with 46 deals announced in 2004. The total aggregate value of the 10 deals for which pricing was disclosed in 2005 totaled $915 million, compared with $1.55 billion for four deals for which pricing was disclosed in 2004. However, there were a total of seven deals announced in 2005 valued in excess of $35 million, compared with only four during the same period in 2004. Moreover, one of the four deals in 2004 was valued at $1.26 billion, with most of that value attributed to the acquired servicing portfolio.
Although 2005 has not been an explosive year for M & A activity in the mortgage banking arena, there were some notable deals in the sector that are indicative of future consolidation in the industry. A main driver for M & A activity was the anticipation of a tougher operating environment ahead.
Since June 2004, the Fed has increased interest rates 13 consecutive times. The Fed's actions have resulted in a flattening yield curve, which has led to declining spreads throughout the financial services industry.
Many smaller players began to explore their strategic alternatives in 2005 as a result of spread compression and its negative impact on profitability, the expectation that mortgage originations would decline from the robust levels of recent years, and concerns about the frothy housing market and a possible turn in consumer credit quality.
During 2005 we did not see the megamortgage banking players emerge as buyers. With fully built origination platforms already in place, the megalenders are well-positioned to tap all segments of the market and efficiently source a diversity of products through their retail, wholesale and correspondent channels. Additionally, the largest players found little motivation to expand through acquisition in the face of a market environment that could require significant "rightsizing."
According to Inside Mortgage Finance, during the first nine months of 2005, the 10 largest originators increased their overall production by more than $100 billion compared with the same...