Record-Breaking MortgageTech M&A Despite the Refi Calamity

This is very likely to be a tumultuous year in MortgageTech & Services.  The past two years were HUGE with over $20 BILLION in transaction value, with M&A driving more than half of the action including two mega-deals – the ICE/Ellie combination in 2020 and CoreLogic/Stone Point go-private in 2021.  We’ve already had a $1 billion deal in February, and we expect at least a mega-deal per year as the industry consolidates on the natural scale advantages.  

As for the M&A trends this year, our industry checks suggest healthy acquisition appetites fueled by successful PE fundraising and enlarged company cash balances.  

As depicted in the chart below, the past two years held a steady $4bn M&A pace (excluding mega deals).  The potential for 2022 seems powerful given that leading MortgageTech players have more than $4bn in cash AND private equity funding represents 3-4X more in available funds.  Combined with our clients and other industry commentary, we believe 2022 could set a $5bn record M&A pace, which may come as a surprise given the anemic mortgage market outlook.

Industry Conversations - Every year we survey the key players to get a sense of their outlook and M&A priorities for the new year.  For 2022, the consensus paints a dramatic picture: 

• Well anticipated collapse: The Mortgage Bankers Assoc. (MBA) economists have a well-deserved rep for cautious outlooks and predict loan volumes will be down 34% YOY, driven by a 60% collapse in refinancing.  The good news?  The end of refi was widely anticipated and Originations (~2/3rds of 2022e volumes) are forecast to rise 3% YOY. 
• Big shrinks slowly: As a $3.8 trillion mortgage market contracts to a $2.6 trillion market, observers expect providers will need to scramble to right size excess capacity in all parts of the mortgage arena from operations to warehouse lending lines.  
• M&A on the downstroke:  If M&A was strong during peak volumes, it stands to reason that acquisition hunting should continue as we move off-peak – with a boost from record levels of private equity funding and strategic cash surpluses. 
• Jet fuel for acquired growth:  Expect competition for acquisitions to continue as cash strong incumbents seek growth assets.  Our buy-side clients are in pursuit of innovation in both early-stage venture investments and later-stage buyouts.  The most active acquirers experienced free cash flow growth that was 2X revenue growth – this cash should jet fuel more M&A.
• Digital momentum: There is no rest for the weary in trying to break the inertia preventing more automation in mortgage.  COVID has catalyzed many digital pivots – for example with Notary Services and RON (Remote Online Notary) approvals (national standards would be a huge spark).  It is only a matter of time before the data scientists and operation teams find a way to permanently digitize mortgage loan manufacturing, integrate blockchain into property rights, and evolve to online/hybrid consumer autographs.
• Talent disrupted: The “Big Quit” is hitting the MortgageTech market as hard as any other.   As mostly mid-level managers and some executives depart in a “grass must be greener” exodus – leaving the incumbents even more hungry for talent through acquisition.

The year is off to a fast start for Harbor View Advisors as we just led the closing of a client exit in the Loan Quality Control space and we expect to be in the market with several sell-side opportunities including:

• Technology-enabled default servicing
• Pricing engine for specialized loans
• System integration consulting

As well as buy-side client engagements in:

• Enterprise risk management
• Financial technology consulting
• FinTech venture investing in payments, intelligence, and origination

Sources: Pitchbook, Company reports, MBA forecast, HVA estimates

DISCLAIMER This presentation is intended for information and discussion purposes only and does not constitute legal or professional investment advice. Statements of fact and opinions expressed are those of the participants individually and, unless expressly stated to the contrary, are not the opinion or position of Harbor View Advisors, LLC (“HVA”). The information in this presentation was compiled from sources believed to be reliable for informational purposes only. HVA does not endorse or approve, and assumes no responsibility for, the content, accuracy or completeness of the information presented.