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[ad_1] In the reflection, a mortgage executive sees faint images of the savings and loan crisis of the 1980s and 1990s. The financial chaos that sparked the savings and loan crisis of the 1980s, leading to a government bailout, now haunts the independent mortgage banking market this Halloween season — and beyond. Independent mortgage banks (IMBs) account for nearly 74% of agency mortgage originations, which is the bulk of the market, according to a recent report by the Urban Institute’s Housing Finance Policy Center (HFPC). In 1980, some 4,000 savings and loan institutions (S&Ls or thrifts) accounted for about half of the nation’s $960 billion in outstanding home mortgages at that time. The federal agency set up in the late 1980s to oversee and dispose of the assets of failed thrifts, the Resolution Trust Corp. (RTC), closed 747 S&Ls with assets of more than $407 billion.  One market expert sees a similar fate ahead for IMBs, absent an RTC, predicting that over the next two years more than one-fifth of the nonbank lenders now operating nationwide will merge or otherwise disappear.  The pressure cooker prompting that dire prediction is being heated by persistent inflation and rising interest rates. Mortgage origination volume this year is projected to decline drastically, by $2 trillion to $2.1 trillion compared with 2021, according to estimates by Fannie Mae, Freddie Mac and the Mortgage Bankers Association (MBA). Most of that decline will be on the refinance side, with the MBA estimating that the refi share of originations will drop from 62% last year to 33% this year and 27% in 2023. Rate locks on rate-term refinancings in August were down 93% from a year ago and cash-out refis were down 78%, according to Black Knight. “Many [IMBs] expanded operations during an unsustainable refi boom and now face painful adjustments,” said Richard Koss, chief of research at New York-based mortgage-data analytics firm Recursion. John Toohig, head of whole-loan trading at Raymond James in Memphis, explained that the mortgage market has essentially been cut in half from last year’s volume. “So, there’s fewer loans to go around, fewer loans being sold at premiums, so mortgage companies are likely in for consolidation,” he said. Storm Brewing Tom Capasse is managing partner and co-founder of New York-based Waterfall Asset Management, a global alternative investment manager with some $11 billion in assets under management. The firm specializes in asset-backed credit, whole loans and private equity. There likely will be 40 to 50 deals done this year. The primary deals are large IMB’s buying smaller IMBs.  Garth Graham, senior partner at stratmor group Capasse sees the headwinds facing the independent mortgage banking industry over the next couple years as being near hurricane-force in their impact. He points out that in 2021, 85% of the U.S. mortgage market was ripe for refinancing, but today closer to 10%.  “There’s roughly 4,400 independent mortgage banks in the United States, and we estimate that probably half two-thirds today are breaking even at best,” he added. “[Origination] volumes have fallen 50% to 60%, but margins have fallen 75%. “You’re going to have a lot of fallout,” Capasse added. “We think that this period of restructuring that’s occurring in industry is probably an 18-month to two-year process, and at least one-fifth of the industry will probably merge or go away.” There are many economic variables that can yet affect the future course of events in the industry, for better or worse, including Capasse’s dire projections for the IMB market. Still, signs of the stress facing the market have surfaced already this year — with the Chapter 11 bankruptcy filing by First Guaranty Mortgage Corp; the failure of Sprout Mortgage; a dozen channel exits; and the many mergers and acquisitions completed or in motion. Garth Graham, senior partner and manager of mergers and acquisitions activities for the STRATMOR Group, a Colorado-based mortgage advisory firm, said for all of 2021, there was a total of 29 merger and acquisition deals that involved at least one IMB. So far in 2022, he added, “there are over 25 already, and the pace is picking up.” “There likely will be 40 to 50 deals done this year,” Graham said. “The primary deals are large IMB’s buying smaller IMBs.” Graham explained that if a smaller IMB’s loan volume is cut in half, it’s hard for that lender to cut its corporate expenses in half to remain profitable. “Meanwhile,” he added, “a large buyer might be able to load that same [mortgage] production [via an acquisition] and not take on any [additional] corporate expenses.” “Lenders that turn all their attention to refinances when that business skyrockets enjoy huge profits,” Graham said. “But the tide always eventually turns, and when it does, many of those lenders struggle to stay afloat. “We’re seeing a lot of that this year, and it will certainly continue in 2023.  … Over 50% of IMB’s lost money in Q2, and that number will go up in Q3.” Graham said there are now many buyers who are active in the IMB space, and “the lender who does not want to risk their company or put capital into their company during this downturn should (and is) considering an exit.” “We get calls every day on that basis,” he added.   Past is Present Rising interest rates, inflation and risky loans made to chase higher returns all contributed to the rolling S&L industry crisis in the 1980s. Texas was ground zero for the S&L industry implosion, with more than 40% of thrift failures in 1988 — the peak year for the crisis — occurring in the Lone Star State. This looks a lot like that [the S&L crisis], though there won’t be any RTC, but it smells a lot like what happened back in those days, when savings and loans got restructured or went out of business. Tom Capasse, managing partner of Waterfall Asset Management “Emblematic of the excesses that took place, in 1987 the FSLIC [the now-defunct Federal Savings and Loan Insurance Corp.] decided it was cheaper to actually burn some unfinished condos that a bankrupt Texas S&L had financed rather than try to sell them,” states the Federal Reserve synopsis of

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