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68 WestStar, Alterra Home Loans, and others. VALUATIONS In recent years, lower rates, swelling mortgage banking profits, and mini refinance booms have resulted in significant growth in company values. At the same time, TILA- RESPA (TRID) and other technology-related changes in line with Dodd-Frank regulations, in addition to growing concerns around Fair Lending and its impact on the costs of the manufacturing process, are driving the discussions around M&A due to the burdens these requirements have on smaller organizations. In a rising rate environment, the ability to identify and retain high-performing originating and operating leadership is critical for a mortgage lender's success, that is, if they can afford the increased costs associated to recruiting and retaining such resources. Another option is to consider being acquired by a larger, more financially secure firm. If they don't sell now, the uncertainty in withstanding market lulls and origination headwinds driven by the rising rate forecast will diminish the values that most mortgage companies experienced over the past two years. THE TRUMP ECONOMY Trump's election victory drove the construction and material sector stocks soaring, thanks to his commitments to infrastructure spending and broadening new home construction. In parallel to that are Trump's promises to lower corporate and personal tax brackets, both of which will drive the housing economy. Lower personal taxes will invariably lead to larger down payments on homes, while the pro-growth corporate tax changes will propel executive confidence and deal appetite. New tax proposals, another noted priority of the new administration, would tax U.S. companies on accumulated foreign earnings, which could encourage them to bring back at least some of more than $2 trillion currently held abroad. In addition to organic investments and payouts to shareholders, a portion of this capital will go to M&A. For a clue about what happens next, one might look to 2005. Following a similar tax holiday in 2004, deal volume involving U.S. acquirers increased 34 percent, according to Dealogic, a financial markets platform. e same thing could happen next year. By 2018, reduced corporate tax rates enacted by the Trump administration will begin to hit company balance sheets. With regulatory relief opening up funding and capital availability, acquisition targets will become more attractive. RATES Rates remain at unprecedentedly low levels, effectively two percentage points below rates in 2005—a time when the mortgage market was twice the size it is today. It is worth noting the 10-year and 2-year Treasuries are both hovering around 2008-2009 levels, reflecting a tremendous amount of growth opportunity that can operate in a much more expensive environment to manufacture a loan. e upside to this is the growth in the purchase market share. is year, the industry expected to see $1.6 trillion in origination volume. In 2018, we are expected to see a slight decrease at $1.5 trillion followed by a small rebound in 2019 to $1.65 trillion. e boom years, however, will be realized in 2020-2021, when volume is likely to rise aggressively to $2.5 trillion by the end of Trump's first term. Trump's economic policies may help (or hinder) these forecasts through expanded job and wage improvements. HUD and the Treasury are targets of reductions to agency discretionary budgets, according to Trump's proposed federal budget submitted to Congress. With increases in Veterans Affairs and Defense, and decreases in HUD and Treasury, it will be interesting to see a possible expansion not only in VA programs but also possibly other programs that are tasked by HUD to expand homeownership through policy, research, and advocacy. Right now, we have a growing market share in nondepository originations that exceeded 50 percent of all originations in 2016. is is a trend that is not going to reverse itself anytime soon. Market conditions over the next five years are very favorable to well-capitalized firms and nondepository mortgage banks that aggressively expand across a large, multi-license footprint. Nondepository servicing is at the highest point on record at over 32 percent, also a trend that supports well-capitalized mortgage banks. A PERFECT STORM More than 30 percent of independent mortgage banks will be acquired in the coming 16 months because of these factors, which are directly related to the timing and policies of the Trump administration. e competition for deals will artificially drive company values higher for organizations with annual production volumes between $500 million and $1 billion. What happens to these companies from here will depend largely on their size. Companies with less than $500 million annually will be subject to asset acquisitions and will mostly be assimilated due to operating pressures. Meanwhile, smaller firms with net worth less than $3 million—which account for over 2,000 mortgage banks nationwide—will be forced to seek outside capital but will likely close or consolidate. e value of such firms is often lower than the sweat equity the owners put into the company, and as such owners will rarely if ever realize what they consider "fair market value" for their firm. But without the needed capital, options are very few. Not all of the increase in M&A activity can be attributed to the new President's policies. Consolidation was already picking up steam months before the election. In the first nine months of the year, the number of mortgage industry acquisitions in 2016 had already exceeded the previous year's, according to Earnst & Young's November 2016 report. Freedom Mortgage alone, already one of the largest nonbank U.S. lenders, has made five acquisitions since 2014. Other market factors are likely to contribute to the trend. Housing demand will surge over the next decade, according to the Mortgage Bankers Association, with as many as 16 million new households being formed. Residential construction spending, while not as feverish as it was in the mid-2000s, is on the rise as well. e bottom line is that the Trump administration is generating a perfect storm for M&A, leaving the remaining mortgage lenders to take advantage of a growing mortgage market in 2018-2021. So if you are tired of reading about M&A activity, you might as well settle in—it's going to be awhile. 68 "Companies with less than $500 million annually will be subject to asset acquisitions and will mostly be assimilated due to operating pressures. Meanwhile, smaller firms with net worth less than $3 million—which account for over 2,000 mortgage banks nationwide—will be forced to seek outside capital but will likely close or consolidate."

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