The Mortgage Broker Renaissance
Tight margins, regulatory clarity and a renewed appetite to expand are making the wholesale channel attractive again
Tight margins, regulatory clarity and a renewed appetite to expand are making the wholesale channel attractive again
Adecade ago, the wholesale origination channel was in full meltdown, a nuclear waste pile that few lenders wanted to be associated with. Today, the four large bank mortgage lenders still keep their distance. None of them have a direct wholesale lending channel, though as correspondent aggregators, they will buy brokered loans sold to them by other wholesalers. But for small and midsize lenders — depositories and independent mortgage bankers alike — wholesale lending has again become an attractive option to expand residential real estate lending. The shift comes at a time of soaring costs and an originations market expected to decline for the second straight year.
This increased flow of capital to the wholesale channel has sparked a renaissance for mortgage brokers. Employment in the sector peaked at 148,200 workers in April 2006, before falling to a post-crisis trough of 55,200 in June 2011. Since then, brokers have been on the rebound, growing to 94,000 in December 2017, according to the Bureau of Labor Statistics.
The mortgage broker business never fully went away after the crisis. But high compliance costs, combined with fewer outlets to fund loans and securitize them, changed the economics of the business. It became difficult, if not impossible, for many of the smaller broker shops to remain in business.
But now, the industry is taking a fresh look at mortgage brokers as it searches for ways to lower its own origination costs and increase market share.
While the retail channel offers lenders the highest gain on sale for their originations, it’s much more expensive to operate because of the costs associated with maintaining a network of physical branches and large payrolls.
Meanwhile, the wholesale channel offers lenders the second highest net return on their loans, behind only consumer-direct lending. Among large independent mortgage banks and depositories with more than $5 billion in annual volume, per-loan profits from brokered loans were nearly 25% higher than retail originations, according to Mortgage Bankers Association estimates.
The wholesale channel can also help lenders quickly establish a presence in new markets and is a key strategy for organizations looking to grow, while brokers are slowly but surely overcoming the residual stigma from the mortgage crisis.
There are a number of reasons brokers bore the brunt of the fallout from the mortgage crisis. The decimation of broker employment started with the downfall of large wholesalers, particularly those willing to fund the most exotic and risky mortgages during the boom years. Capital dried up to fund new loans and brokers had few options to stay in business.
Then came the blame game. As the world sought to explain how a housing bubble metastasized into a full-blown economic meltdown, vocal critics within the mortgage industry, consumer advocates, politicians and others placed the blame squarely on brokers.
Brokers — which at their peak arranged nearly two-thirds of all mortgage originations — were painted as unsophisticated and underqualified participants, with a financial incentive not to act in borrowers’ best interests. Brokers, critics claimed, stretched the boundaries of already lax underwriting standards because their compensation was tied to loan volume, rather than the long-term performance of the mortgages they arranged.
Meanwhile, the few brokers still in business countered that wholesalers and their Wall Street securitizers were responsible for establishing underwriting standards and they were the ones who got greedy. But that argument fell on deaf ears, particularly compared to the words from the head of one of the largest precrisis wholesalers.
“My biggest mistake, probably of my whole career,” JPMorgan Chase Chairman and CEO Jamie Dimon said in 2009, “was not closing down our mortgage broker business sooner.”
It didn’t help that the broker sector was mostly made up of small organizations, or even single originators in business for themselves. So while large financial institutions deemed “too big to fail” received large financial bailouts, the relatively fragmented broker sector was left to fend for itself.
Likewise, as a stringent regulatory framework emerged to prevent a similar catastrophe from happening again in mortgage finance, brokers lacked the resources and lobbying might to influence policymakers.
To be sure, the entire mortgage industry now faces far greater regulatory scrutiny and compliance obligations. But many of the new rules create unique complications for brokers, particularly around issues related to loan officer compensation and borrower disclosures requirements.
But times have changed, and brokers and wholesalers have implemented the process changes necessary to operate in the new environment. For example, there was some initial confusion over whether brokers or wholesalers would issue and be responsible for the accuracy of the new Loan Estimate disclosure to borrowers under the TILA-RESPA integrated disclosure rules. More than two years later, while practices may vary, the parties have some certainty what they are doing passes muster.
One regulatory change that actually helped brokers was the Secure and Fair Enforcement for Mortgage Licensing Act, which requires all loan officers to register with the Nationwide Multistate Licensing System and undergo background checks. It also requires testing and continuing education for loan officers at nonbank lenders and brokers.
There’s a sense among many origination professionals that the SAFE Act created a more professional environment in the industry, particularly among brokers.
In the wake of the wholesale channel’s decline, many brokers went to work for depository and nonbank mortgage lenders. But it wasn’t always a good fit for brokers with an entrepreneurial streak who were used to working for themselves. Many of those professionals are coming back to the broker business.
To that end, last month the House of Representatives passed a bill, the TRID Improvement Act of 2017, which includes a provision that will allow transitional licensing for depository loan officers who want to work at nondepository mortgage companies.
Meanwhile, lenders are being drawn to the wholesale channel by the prospects of expanding their geographic footprint and increasing market share.
Flagstar Bank, in Troy, Mich., funds mortgages through retail, wholesale and correspondent channels. But executives there tend to think of Flagstar’s wholesale channel as another “flavor” of retail.
“We think it’s a great business, it’s one of the more profitable channels for us. It really allows us to be able to leverage our retail platform,” especially for underwriting and closing loans, said Kristy Fercho, Flagstar’s president of mortgage.
Another advantage is that “it gives you access to new markets pretty quickly. So where you don’t have brick and mortar branches, you can easily access new markets through the wholesale channel,” she said.
Flagstar’s wholesale business is nationwide. Its retail division operates in 27 states, after recently adding California, Oregon and Washington when it purchased Opes Advisors about a year ago. Flagstar only has banking branches in Michigan, though it recently agreed to acquire eight branches of Desert Community Bank in California.
That diversity helps the bank guard against geographic risk. Plus, it expands the opportunity for Community Reinvestment Act credit.
Flagstar has a targeted gain on sale margin of 60 basis points for correspondent originations, 90 basis points for wholesale loans and 300 basis points for the retail channel.
The shift to a purchase market is another reason for banks to get into wholesale. “Brokers have great relationships in local markets with real estate markets and the local trusted advisors,” Fercho said, adding that it gives the bank access to different players in those markets.
Mortgage brokers having multiple outlets for their product benefits the wholesaler as well, she said. The broker is not trying to tailor an application to get it to fit into the bank’s guidelines; that loan can be taking to a more appropriate funding source.
“It really allows the bank to stay true and committed to what their credit profile is and not feel the pressure [from its own retail loan officers] to go down the spectrum in terms of product diversification,” Fercho said. Rather, the bank operates within its risk appetite when purchasing a brokered loan.
But competition among wholesaler lenders — even with fewer of them out there to buy loans — is one of the downsides, she said.
“You are only as good as your last loan, so wholesalers need to make sure they have a great service experi- ence, one that’s easy to do business with,” Fercho said. “Because [mortgage brokers] have other options, it puts the onus on you to be able to have a good process, to have an easy process, and to have the ability to guarantee you can close that loan.”
For a bank lender, the regulatory environment it operates under — oversight by the Office of the Comptroller of the Currency if it has a federal charter — also is a factor.
Because it is the mortgage broker at the point of sale, not the bank’s own loan officer, control of the process is an issue. Plus, there are fair lending concerns that nonbank wholesale lenders don’t have to worry about. “For banks it could make it difficult to compete in this space as a result,” Fercho said.
Homebridge Financial Services, a privately held independent mortgage banker based in Iselin, N. J., has two competing wholesale production units, Homebridge Wholesale and REMN Wholesale.
Both offer the same products, but not necessarily at the same pricing, said Homebridge Financial’s CEO, Peter Norden. And account executives from both units are free to compete for the same broker’s business.
“One of the reasons why I like having wholesale,” he said, is that “every company I’ve ever had has been about diversification.” That approach encompasses diversity in both geographic scope and origination channel.
“I’ve always believed having multichannels was good for the overall business to be able to hedge one against another,” Norden added. “Just in case one slows down dramatically, the other can usually pick up the slack.”
So operating two wholesale units is, “very complementary to our retail production channel. If retail should slow down in one area of the country, the wholesale side in that area of the country may in fact pick up the slack and offset any decreases in the other,” Norden said.
Until the February 2017 acquisition of Prospect Mortgage, Homebridge had a 50-50 split between wholesale and retail production. The acquisition upped Homebridge’s retail share to 65%.
But Norden is still a strong supporter of wholesale lending.
Having a wholesale business is important for companies that want to retain the servicing rights from their production and build up the annuity income from that asset. It is quicker to amass a portfolio through the wholesale channel than retail.
The business itself can generate some pretty decent profit margins and is complementary to the retail channel for companies that do both — although those profits are not at the same level as retail is from a margin perspective, Norden said.
Another advantage of wholesale is that lenders can ramp volume up or down by adjusting its pricing.
“If I need an extra $200 million a month in production and I need to push it, I can become more aggressive in price and generate that business,” said Norden. “If I need less I can back off pricing because I am picking it up elsewhere.”
That strategy doesn’t work in retail, where in-house loan officers are dependent upon maintaining their referral relationships.
“You can’t control the flow of business in retail and if you do, you’re subject to losing your retail loan officers. If you start playing with your price dramatically to the point where it affects their volume, you’d be really at risk with your sales personnel on the retail side,” he said.
Because of margin compression and the cost of compliance, a number of small mortgage bankers that had been in wholesale are not only exiting the channel, but have become brokers themselves, Norden said.
“So they have better expertise in the business, increasing the overall quality of the broker. The overall quality of the mortgage broker compared to 10 or 15 years ago is really night and day. It’s dramatic,” he said.
“If I need an extra $200 million a month in production and I need to push it, I can become more aggressive in price and generate that business.”
— Peter Norden CEO, Homebridge Financial
A shrinking mortgage banker community actually makes it a good time to get into wholesale because margins are likely to rise with fewer competitors, Norden added. “For anyone who is opportunistic, the opportunity is there to pick up market share as the industry consolidates.”
And at least one mortgage broker likes that the four largest commercial banks aren’t active in wholesale.
“When Wells Fargo left the business, I remember sort of joking to our rep who’d I known for years, ‘I can’t wait for Wells to leave and let 20 other banks take their share,’ because that is what it would take [to replace them],” said Andrew Weinberg, president of Great Neck, N.Y.based mortgage brokerage Silver Fin Capital. “And that is what I think has happened. We’ve seen additional smaller lenders pick up that slack and that opportunity.”
The more diverse pool of wholesalers is good for brokers.
“If the market was just the big four, I don’t know that we as a mortgage broker would have as much value or rationale for existence. But it is a fragmented market and it is a transaction that borrowers don’t enter into on a regular basis. The value we can offer is to help navigate someone through this fragmented market and that takes some expertise,” Weinberg said.
Silver Fin has been in business for 12 years and unlike some of its counterparts that moved into the mini-correspondent channel, it never wanted to become a mortgage banker.
“We felt that it was a level of risk and complexity we didn’t want and weren’t sure that it really added value to the client, which in the end is how we establish our reputation, doing the right thing by the client,” Weinberg said.
The housing crisis forced those mortgage brokers that were “less serious or less busy out of the business and the people that remained, in my opinion, are far more experienced and knowledgeable than what was there before,” he added.
Mortgage broker loan officers “have to be fairly quick and sharp with numbers and a lot of pieces of information. So the people that remained had a certain skill set to be able not only sell, but to also know the best place to put the loan to get it closed,” Weinberg said.
One of the new faces in brokering that’s quickly making its presence felt is Motto Mortgage, a franchisor owned by Remax Holdings Inc.
The real estate brokerage franchisor launched Motto in October 2016 and sold more than 50 franchises in its first year. So far, 25 of them have obtained licenses and are actively taking loan applications.
“We’re off to a great start and very excited, as a new franchisor to sell that amount,” said Ward Morrison, the president of Motto Franchising.
Initially, Motto only sold franchises to Remax franchisees. Now, it is also selling to independent real estate brokers, loan officers looking to go out on their own, and existing mortgage brokerages.
As the franchisor, Motto does not originate loans or act as a secondary market seller. But it does have a preferred list of wholesalers that the franchisees must use.
Currently, that list consists of eight companies, all nonbanks. But that is a reflection of the current landscape in wholesaling, rather than an aversion to working with depositories. The franchisor is willing to consider additions to the list, Morrison said.
Motto vets wholesale lenders that want to do business with its brokers to make sure they understand its business model and are able to support franchises “with what we call the white- glove approach,” Morrison said. “As a franchisor, I want my wholesalers providing great tools and service to our franchisees. Whether they are a bank or a nonbank, it doesn’t really matter much to me.”
The company is regularly approached by wholesalers looking to establish a relationship. But Motto is taking a slow and methodical approach to adding new investors, as well as monitoring existing ones to make certain they continue to meet expectations.
Remax claims its agents handled more than 1 million homebuyer and seller transaction sides per year, or 17 per agent, per year. While not all of those deals will get their financing through Motto, “that’s a lot of transactions coming through a Remax that might have a Motto attached to it,” Morrison said.
Wholesale mortgage lending is far removed from its zenith, and it will take some time, if ever, for brokers to regain a prominent role in the industry. But make no mistake, the channel is making a comeback, as lenders seek new sources of volume and a new breed of mortgage brokers restores credibility to a once-beleaguered corner of the origination market.