Bill Tessar (pictured) is coming off the back of an amicable acquisition. The president of private lending firm Civic Financial Services (CIVIC) told MPA that his company’s recent acquisition by PacWest Bancorp from parent company Wedgewood was a “perfect scenario” for every party involved. CIVIC got access to extremely cheap capital, Wedgewood got a big ROI from its initial investment in CIVIC, and PWB got to put their liquidity into CIVIC, which has enjoyed a stellar performance in recent years.

However, Tessar said that as acquisitions become more common throughout the mortgage space, deals aren’t going to be so amicable. He said we’re entering into an era of “winners and losers.”

Tessar noted that CIVIC’s position as a private lending firm meant it had a very different experience of 2020, when conditions drove firms in that space into survival mode. CIVIC thrived where others struggled, resulting in that amicable deal. The conventional side, however, has seen the rising tide of a refi boom and strong purchase market lift all boats. He believes that the period of cutthroat competition that already hit the private lending space will begin for conventional mortgage firms when the refi boom ends.

“Many of these companies have refinanced the same borrower four and five times over the last 18 to 24 months,” Tessar said, “When you take away that churning opportunity and force the companies to compete in the purchase market where just a handful of them can establish themselves as leaders, that ‘winter of death’ idea, that’s going to happen.”

Tessar’s ‘winter of death’ will involve big players gobbling up medium-sized mortgage companies for greater market share. While he believes the smallest companies that stay nimble and debt-free will always do well in their space, it’s the medium-sized companies that have to decide, fast, who they are and what they want to become in the next few months, before they get acquired by a bigger firm.

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Those companies, Tessar noted, were struggling before the refi boom, cutting staff and ordering fewer coffee cups for their offices. Their tightening margins were saved by these historically low rates. Since then, larger companies have broken volume records, gone public, and made huge acquisitions. Tessar believes that some of the medium sized firms given a lifeline by these low rates haven’t been able to fundamentally strengthen their position enough to last when a refi boom tails off.

Breaking the market down, Tessar believes the top 5-10% of firms are in the strongest place, having originated loan volumes in the tens of billions and recorded massive profits as a result. From such a secure place, those companies ought to make better long-term decisions. He expects that top category to get even bigger as the market shrinks.

The resulting acquisitions, Tessar said, will create winners and losers because they’ll be driven by need rather than desire. He explained that these mid-sized firms might die by a thousand cuts, allowing themselves to print red gradually, quarter after quarter, as company leaders place natural human belief in business taking off again.

In that middle-band of firms, he believes that executives need to be disciplined and restructure themselves now so they can operate profitably in a higher-rate environment. In efforts to attract the very best talent, the biggest lenders may start offering “ungodly” signing bonuses to loan officers that medium-sized companies can’t compete with.

“They might not even have to buy these firms, they just need to get their top originators,” he said.

In the face of these seismic predictions for the industry, Tessar explained that individual originators need to stay laser focused on the purchase market. Because competition for purchase volume will set the tempo of this looming consolidation cycle, those originators with the best referral relationships and highest levels of client service will stand out from the pack.

“Those that have benefited from the incredible refi market we’ve seen for the last 24 months, they have to learn a new song quickly,” Tessar said. “The originators that have focused their energy and efforts on the purchase side of the business. Those are originators for life.”