Smart blackjack players know that you can win big if you double down.
Doubling down involves doubling your bet during a hand in return for just one more card. Done strategically, you can significantly boost your winnings — assuming, of course, that you don’t lose.
In some ways, the same holds true in the mortgage industry as it adjusts to the housing market downturn. While some mortgage lenders have folded — Finance of America, Majestic Home Loans, and Sprout Mortgage, among others, in the past several months — others have chosen to double down… by growing.
Take Guild Mortgage Co. The San Diego-based independent mortgage lender acquired three independent mortgage lenders in the last few months. Guild acquired Wisconsin-based Inlanta Mortgage Inc. in December; New Mexico-based Legacy Mortgage in February; and Colorado-based Cherry Creek Mortgage in March.
Watch The Interest
This is not a new strategy for Guild, which was founded in 1960 but is now a wholly owned subsidiary of Guild Holdings Co. after going public in 2020. Over the past nine years, Guild has acquired seven other mortgage-industry companies. (See list.)
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In a letter posted to the company’s website a few years ago, CEO Mary Ann McGarry explained Guild’s growth strategy.
“Through targeted acquisitions and loan officer recruitment, we have grown our annual origination volume from $1.4 billion for the year ended Dec. 31, 2007, to almost $28 billion for the 12 months ended June 30, 2020,” the letter stated, “and our servicing portfolio from $2.5 billion of unpaid principal balance (UPB) as of Dec. 31, 2007, to $52.8 billion as of June 30, 2020 (in each case, excluding any subserviced loans). And, throughout this period of growth, we have remained focused on profitability.”
Some of the figures in the letter require updating. According to an annual report filed with the Securities and Exchange Commission for the fiscal year ended Dec. 31, 2021, Guild originated $34.3 billion for all of FY2020, and $35.7 billion for FY2021. For FY2022, Guild originated $19.1 billion.
Mary Ann McGarry, CEO, Guild Mortgage Group, is retiring in June after nearly 40 years with the company.
In her letter, McGarry added, “[W]e believe our growth story is far from complete, and that we have the potential to expand our geographic footprint from the 31 states where we currently have retail operations to include all 50 states over the long term.”
In the time since that letter was posted, Guild has grown its footprint to 49 states and the District of Columbia, primarily through acquisitions.
Guild’s growth strategy is praised by corporate analysts. In an analysis of the fourth quarter of 2022 and a preview of 2023, analysts at JPMorgan said that, given the downturn in the housing market, “we believe cost reductions cannot keep up with this level of market compression, driving further losses and consolidation in 2023. Longer term, we believe this will be the foundation for a return to profitability in 2024.”
An M&A Boom
For Guild, the analysts said that, “While our outlook for the mortgage sector is increasingly cautious, we believe [Guild] will outperform peers in the sector.“ They added that Guild’s “track record of successful acquisitions/integration may also create an opportunity for market share gains as the mortgage industry consolidates.”
“There’s still so much opportunity in local markets out there, and we do really well in smaller communities.”
> Terry Schmidt, incoming CEO of Guild Mortgage Co. and a director of Guild Holdings Co.
Garth Graham of STRATMOR Group, a data-driven mortgage advisor and consultant that provides strategies for independent and bank-owned mortgage lenders, also respects Guild’s growth-by-acquisition strategy and agrees the industry is ripe for mergers and acquisitions.
Graham, a senior partner, manages M&A strategies for STRATMOR. In October 2022, his company published a report on M&As in the mortgage industry, estimating there would be 50 such transactions by the end of the year — 50% more than in 2018, “the next-highest year of lender consolidations in the past three decades,” the report noted.
While 2022 was a strong year for M&A, Graham said in February, there will be “probably 60 transactions in 2023. So, that means, in the span of two years that’s roughly 100 companies that will be involved in some level of merger and acquisition activity.”
Now well into 2023, Graham said he believes the momentum for M&As remains strong. With mortgage rates remaining near 7% and home affordability falling, refinancing mortgages has fallen off a cliff, leaving lenders to fight over the shrinking pool of purchase mortgages that remain.
“There were 13 million mortgages done in 2021,” Graham said. “That’s a really big number for our industry. Last year, there were 5 million. This year, there might be [4.5 million]. So the drop on a unit basis is 60% to 70%. … That means if there’s only 5 million mortgages, every single mortgage originator — and thus every single mortgage company — is fighting over a lot fewer opportunities.”
That results in a significant drop in revenue for lenders, forcing them to consider cuts, he said. “The expenses can’t be shed fast enough and the fixed expenses often can’t be shed at all, which is a real driver in the M&A space,” Graham said.
Independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks reported a net loss of $2,812 on each loan they originated in the fourth quarter of 2022, down from a reported loss of $624 per loan in the third quarter of 2022, according to the Mortgage Bankers Association’s (MBA) Quarterly Mortgage Bankers Performance Report.
Guild, of course, is focused on profitability, but as part of a long-term strategy.
Terry Schmidt, president & incoming
CEO, Guild Mortgage Co. and director,
Guild Holdings Co.
That’s according to Terry Schmidt, who serves both as president of Guild and as a director of Guild Holdings Co. Schmidt is one of three women who hold key executive positions with Guild, joining McGarry, the CEO, and Amber Kramer, the company’s senior vice president and chief financial officer. (As of June 30, Schmidt will become CEO upon McGarry’s announced retirement. Chief Operations Officer David Neylan will become president.)
All three have had long careers with the company. McGarry has been with Guild since 1984, when she joined as an internal audit supervisor, and has been CEO since December 2007. Schmidt joined Guild in 1985 as a member of its audit department, and has been president since August 2020. Kramer signed on in 2004 and held various senior executive positions before being named CFO in August 2020.
‘We Plan To Win’
That continuity allows Schmidt to discuss Guild’s growth strategy from a decades-long perspective.
“We’re really focused [over] the last … 15-20 years on just being a retail franchise operator,” she said. “So we’ve stayed in having a local presence in branches and offices all over the United States. … There’s still so much opportunity in local markets out there, and we do really well in smaller communities … where we get really involved in giving back. We just feel like there’s a lot more opportunity with great small companies that could be available to us.”
She continued, “And when they come to Guild, it’s a win-win for both organizations. We add a lot more value related to the value and the size, and they can still continue to operate their business and grow in our platform.”
Schmidt said Guild views the downturn in the housing market as cyclical, and that it still represents “an opportunistic timeframe for us.” While 2020 and 2021 were incredibly profitable years for the industry, she said, “we feel like now is a better opportunity that we’ve had in the last couple of years.”
She noted that, during those two years, “everybody was so busy just trying to keep ahead of their pipelines. It’s a little bit slower right now, but this is the time to really think about acquiring companies and continuing to just grow organically and get talent.”
As of Dec. 31, 2022, the company reported employing a total of 4,000 people, down from 5,100 a year earlier.
It also reduced compensation for its top executives last year. According to a proxy statement filed with the SEC, McGarry’s overall compensation in 2022 was reduced by 46.1% to $1.741 million; Schmidt received $1.565 million in compensation last year, a 34.5% cut.
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Guild is set up to grow, Schmidt said, because it has the capital to make acquisitions. As of Dec. 31, 2022, the company had $162.2 million in cash and cash equivalents, and $78.9 billion in unpaid principal balance (UPB) for its servicing portfolio.
“Now is a good time to be an investor, to invest in your future, and that’s what we’re doing,” she said. “A lot of companies aren’t in that situation and don’t have the ability to do that. … We’ve been pretty disciplined about that over the years, so that when we’re in times like this, we’ve got capital available to be able to take advantage of the dislocation in the market.”
Schmidt added that, earlier this year, Guild held a “sales rally” at which she told the staff that the company plans to continue to double down on acquisitions in the market.
“I said, ‘There’s going to be winners and losers, and we plan to win.’”
Anteing Up
Guild Mortgage has been an active player in acquiring other mortgage-industry businesses to boost its market share. Since 2014, it has acquired eight companies. Here’s a breakdown:
