Smaller mortgage vendors face squeeze from lenders, regulators

Mortgage vendors are entering a new phase of consolidation as they respond to rising regulatory and cybersecurity pressures, according to a white paper released this week by investment banking firm Houlihan Lokey.

Scale is also becoming a decisive advantage for companies that sell mortgage technology and services, a trend that follows a mergers-and-acquisition wave among their clients, including the country’s top lenders and servicers.

“The market is still highly fragmented with many tech-enabled mortgage services vendors that are subscale companies unable to compete with the larger ones,” said John Guzzo, managing director in the firm’s financial services group. “We see the customers of these subscale vendors moving to the larger scaled vendors.”

The industry has seen deals across title, processing and other mortgage services. Recent transactions reflecting this trend include Title Resources Group and Doma, with Doma’s closing and escrow unit acquired earlier this year by Opendoor; PartnerOne‘s purchase of Mortgage Cadence; and Reverse Focus closing a deal for Apiro Marketing.

Guzzo said the dynamic is especially clear in residential appraisal management and related services, an area estimated to be worth “north of $9 billion.”

“There’s hundreds of appraisal management companies, but there’s about only five larger ones of scale,” he said. “The largest five control approximately 30% to 35% of the appraisal originations market. So, you have close to 70% of the market that works with the small-cap vendors, and that’s going to shift.”

In this environment, “larger” vendors often mean those with more than $100 million in revenue and at least $15 million to $20 million in EBITDA, although thresholds vary by subsector.

Sources of pressure

The Houlihan Lokey paper highlights how recent mandates from Fannie Mae and new federal privacy rules, including the Homebuyers Privacy Protection Act, have significantly increased the cost and complexity of operating as a mortgage vendor.

At the same time, the average cost of a financial services data breach has climbed above $5 million, and the use of artificial intelligence in fraud has made cybersecurity programs more complex and expensive.

“Many of the smaller mortgage vendors are facing headwinds and will likely be getting sold to the larger vendors over time, or they will continue to struggle to keep market share as they don’t have the capital to keep up with cybersecurity, compliance and everything you need to have to effectively compete in this market,” Guzzo said. “They’re eventually either going to get acquired or slowly will just go away.”

Guzzo added that large banks and top-tier nonbank lenders are now conducting deeper cybersecurity audits of key vendors in response to recent industry breaches.

Buying preferences

Lenders and servicers are also reshaping the vendor landscape through their buying preferences. There is a clear trend toward single-vendor, multiproduct platforms that can handle large swaths of the mortgage life cycle. This is driving a shift toward broader “one-stop shop” providers.

“We are beginning to move from single-product vendors to multiproduct vendors that have a diverse product suite,” Guzzo said. “One of the biggest drivers of this is the lenders. They don’t want to deal with 10-plus vendors. If they could just go to a smaller subsegment of larger vendors that provide multiple products, it makes it easier and less costly for the lender to manage.”

That is changing the nature of M&A. Buyers are increasingly focused on acquiring capabilities such as broker price opinions on the servicing side, new software and domain expertise, rather than just revenue.

To build these multiproduct platforms, vendors are tapping private equity and institutional capital, including international investors, Guzzo said.

“We have seen investments from Europe into the market. We’ve even seen investments from the Middle East. They’ll do it through U.S.-based funds, but the money could be from Europe or from Asia,” he said.