The Mort­gage Bro­ker Re­nais­sance

Tight mar­gins, reg­u­la­tory clar­ity and a re­newed ap­petite to ex­pand are mak­ing the whole­sale chan­nel at­trac­tive again

National Mortgage News - - Contents - by brad finkel­stein

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.

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