Whole­sale Rein­ven­tion

Mat Ish­bia is out to con­vince bro­kers the best mort­gage isn’t al­ways the cheap­est

National Mortgage News - - Contents - By Bonnie Sin­nock

When the hous­ing cri­sis sent big banks flee­ing from third-party orig­i­na­tions, fam­ily-owned United Whole­sale Mort­gage dou­bled­down on the chan­nel, in­vest­ing in in­no­va­tive tech­nolo­gies and mar­ket­ing strate­gies to ap­peal to mort­gage bro­kers.

UWM be­came the largest whole­sale lender af­ter the chan­nel hit rock bot­tom ear­lier this decade. Now that third-party orig­i­na­tions are mak­ing a come­back, the com­pany is de­ter­mined to chip away at the re­tail chan­nel’s mar­ket share.

At the same time, UWM must pro­tect its po­si­tion from a grow­ing num­ber of whole­sale com­peti­tors. To do this, Pres­i­dent and CEO Mat Ish­bia has set out to be an ally to mort­gage bro­kers in un­prece­dented ways, par­tic­u­larly when it comes to tech­nol­ogy, re­fer­ral mar­ket­ing and im­prov­ing op­er­a­tional ef­fi­cien­cies.

In do­ing so, UWM is seek­ing to re­make a piece of the whole­sale chan­nel by en­cour­ag­ing bro­kers to think be­yond get­ting the low­est price for a mort­gage and in­stead, con­sider other fac­tors that con­trib­ute to a suc­cess­ful orig­i­na­tion.

For ex­am­ple, the com­pany is work­ing to im­prove mort­gage bro­kers’ dig­i­tal reach in a mar­ket where busy con­sumers are apt to shop and ap­ply for loans on­line. These ef­forts are prompt­ing de­bate about cus­tomer ac­qui­si­tion and where the long-term value of cus­tomer re­la­tion­ships re­sides.

As new en­trants are drawn to whole­sale lend­ing by its lower-cost struc­ture, it re­mains to be seen whether UWM’s tac­tics will re­main rel­e­vant in the face of this ris­ing com­pe­ti­tion and the threat of a race to the bot­tom if the chan­nel be­comes more com­modi­tized.

Key to this ques­tion is whether whole­salers can rely on bro­ker loyalties as the chan­nel be­comes more crowded. While bro­kers value those close re­la­tion­ships, they don’t want to de­vote them­selves to any par­tic­u­lar lender to the point that it would pose a con­flict of in­ter­est with their obli­ga­tions to bor­row­ers.

But by dou­bling down on this ap­proach, Ish­bia is bank­ing on UWM’s abil­ity to meet the needs of bor­row­ers and bro­kers alike, while turn­ing a profit at the same time.

Ask Ish­bia about any of his com­peti­tors and the an­swer is al­ways the same: “What­ever is best for con­sumers is go­ing to win at the end of the day.”

With the help of its bro­kers, UWM is win­ning the whole­sale chan­nel. The pri­vately held, fam­ily-run lender lays claim to a 15% to 20% share of the whole­sale mar­ket and is widely iden­ti­fied as the chan­nel’s big­gest player.

It is a far cry from the pub­licly traded bank­ing gi­ants that dom­i­nated whole­sale be­fore 2008, and in that sense, the com­pany is em­blem­atic of whole­sale’s gen­eral state since the mort­gage cri­sis: a lower-pro­file busi­ness dom­i­nated by a small num­ber of non­banks.

But whole­sale’s pro­file is ris­ing as play­ers like Pen­nyMac in­ject the chan­nel with new cap­i­tal to fund loans. And mort­gage bro­ker em­ploy­ment has re­bounded, reach­ing lev­els not seen in a decade.

On one hand, Ish­bia con­sid­ers this a “ris­ing tide that lifts all boats.” But he also ac­knowl­edges UWM may be fac­ing more com­pe­ti­tion from com­pa­nies with busi­ness mod­els too close to his own.

Re­tail may still dom­i­nate the busi­ness, but among larger non­banks, it is los­ing ground to lower-cost lend­ing chan­nels.

Large in­de­pen­dents gen­er­ated just 29% of their 2017 vol­ume from re­tail lend­ing, ac­cord­ing to data from the Mort­gage Bankers As­so­ci­a­tion and Strat­mor Group. The re­main­ing 71% came from whole­sale, cor­re­spon­dent and con­sumer di­rect.

“One of the big fo­cuses to­day is to get the price of orig­i­na­tion down,” said Bill Pearce, CEO and chair­man of Maxex, a se­condary mar­ket and due dili­gence plat­form.

All mort­gage chan­nels are sus­cep­ti­ble to price wars, given the thin­ning vol­umes and mar­gins through­out the in­dus­try. But since whole­salers must con­tend for busi­ness on a loan-by-loan ba­sis, price com­pe­ti­tion is ex­traor­di­nar­ily tough.

Em­pha­siz­ing ser­vice rather than price is a way to ad­dress that con­cern, Ish­bia said. Some bor­row­ers want noth­ing but the low­est prices, but oth­ers have dif­fer­ent pri­or­i­ties, he noted.

“A close on a par­tic­u­lar date may be the No. 1 pri­or­ity, the sec­ond pri­or­ity may be the low­est rate and the third pri­or­ity might be the cheap­est clos­ing cost,” Ish­bia said.

Like many whole­salers, UWM prides it­self on of­fer­ing bro­kers dis­tinct ser­vice that trans­lates into a bet­ter ex­pe­ri­ence for bor­row­ers. And for now, it may have an up­per hand on new com­peti­tors that haven’t seen how the re­la­tion­ships between whole­salers and bro­kers have evolved since the mort­gage cri­sis.

Chang­ing Dy­nam­ics

Pre­cri­sis, whole­sale lenders ex­erted more con­trol over cus­tomer re­la­tion­ships and only pro­vided lim­ited op­er­a­tional sup­port to bro­kers. But post-cri­sis reg­u­la­tions have changed this.

Whole­salers to­day have to ex­ert more con­trol over bro­kers’ op­er­a­tions in or­der to en­sure reg­u­la­tory com­pli­ance. And they’re more likely to let the bro­ker take the lead on bor­rower in­ter­ac­tions.

New whole­sale lenders must em­brace this shift to be suc­cess­ful, said a num­ber of board mem­bers from the New York As­so­ci­a­tion of Mort­gage Bro­kers.

“If a new lender wants to get into the busi­ness, they re­ally have to sharpen their pen­cil be­cause the lenders that have been serv­ing mort­gage bro­kers re­ally have fine­tuned their op­er­a­tions quite a bit,” said mort­gage bro­ker Mark Faval­oro, owner of Aamtrust Mort­gage.

The time-sen­si­tive re­quire­ments of the TILA-RESPA in­te­grated dis­clo­sure rule and other com­pli­ance re­quire­ments have shifted in­ter­ac­tions between bro­kers and whole­salers to be­ing more re­la­tion­shipori­ented than trans­ac­tional.

It used to be that a whole­saler could act against a bro­ker’s in­ter­ests and say, “you’ll do busi­ness with me any­way,” said Lou Borsellino, owner of Para­mount Cap­i­tal Ser­vices. Now, “I feel more like we’ve be­come part­ners with our whole­salers.”

A whole­saler that tries to work with bro­kers on a trans­ac­tional ba­sis will limit how much busi­ness it gets, said Deb­o­rah Robert­son, a sales man­ager at whole­sale lender Plaza Home Mort­gage.

“If you go in with a mind­set of, ‘ How do I win?’ then that’s more trans­ac­tion ori­ented,” Robert­son said. “I think it is more ‘slow and steady wins the race’ to­day. How do I de­velop a re­la­tion­ship? How do I prove my­self? How do I earn your busi­ness?”

Re­fer­ral Re­sources

One way that whole­sale-only lenders like Plaza Home Mort­gage and UWM do this is by cham­pi­oning bro­kers’ in­ter­ests in re­fer­ral busi­ness from ex­ist­ing cus­tomers.

“Since we don’t have a re­tail plat­form, if we get a call from some­one who wants to re­fi­nance their loan, it’s sent back to the orig­i­nal orig­i­na­tor,” Robert­son said.

Bro­kers ap­pre­ci­ate this, but don’t de­pend on it. They can al­ways stay in touch with bor­row­ers and com­pete for re­fer­ral busi­ness on their own. Any loy­alty to a whole­saler for the next loan has to take a back seat to the bor­rower’s needs.

“A close on a par­tic­u­lar date may be the No. 1 pri­or­ity, the sec­ond pri­or­ity may be the low­est rate and the third pri­or­ity might be the cheap­est clos­ing cost.” — Matt Ish­bia, CEO United Whole­sale Mort­gage

While bro­kers would like to stay loyal to the whole­salers that have stuck with them long term, they also need to en­sure bor­row­ers are aware of all their op­tions, re­gard­less of the source. Lenders also need to stay com­pli­ant with anti-steer­ing rules. “You have to weigh all the fac­tors first, dis­cuss with the cus­tomer, and let the cus­tomer de­cide,” Borsellino said.

Bor­rower-fac­ing tech­nol­ogy is also be­com­ing more im­por­tant to bro­kers, and whole­salers that can fa­cil­i­tate this have a com­pet­i­tive edge. While shar­ing tech­nol­ogy with bro­kers isn’t new, the tools have got­ten much more so­phis­ti­cated.

Most dig­i­tal con­sumer-di­rect loans are done by re­tail lenders, but bro­kers are still bet­ter suited for help­ing bor­row­ers with unique needs find a lender. “When you deal with some of the on­line lenders, if you don’t fit their cookie-cut­ter mold, you don’t get the loan,” said Rich Biondi, the owner of bro­ker­age RJB Fi­nan­cial Con­sul­tants.

With the bat­tle for bor­row­ers in­creas­ingly play­ing out on­line, dig­i­tal-savvy mort­gage com­pa­nies are ded­i­cat­ing sig­nif­i­cant re­sources to en­sur­ing their mar­ket­ing mes­sage ap­peals to both prospec­tive bor­row­ers and the al­go­rithms that power search en­gines. Larger or­ga­ni­za­tions can lever­age their scale and size­able mar­ket­ing bud­gets to im­prove their search en­gine op­ti­miza­tion, of­ten at the ex­pense of small, lo­cal lenders and bro­kers.

UWM is try­ing to close that gap with a num­ber of ini­tia­tives, in­clud­ing Blink, a con­sumer self-ser­vice point of sale sys­tem that bro­kers can pri­vate la­bel, and FindAMort­gageBro­ker.com, a di­rec­tory for con­sumers to search for lo­cal bro­kers.

Blink helps UWM and bro­kers com­pete with new dig­i­tal mort­gage self-ser­vice sys­tems, while the web­site is de­signed to col­lec­tively give bro­kers more vis­i­bil­ity in search en­gine re­sults than they could oth­er­wise achieve on their own.

UWM takes this a step fur­ther by help­ing bro­kers man­age their op­er­a­tions, too. The com­pany em­ploys more than 50 loan pro­ces­sors to help bro­kers co­or­di­nate tasks like get­ting in­surance, ti­tle ser­vices and other dis­clo­sures doc­u­mented and ready to go be­fore clos­ing.

Like­wise, UWM also plans to dis­con­tinue its em­ploy­ees-only re­tail chan­nel in fa­vor of its staff work­ing with bro­kers — even if that means a bro­ker pairs a UWM em­ployee with an­other whole­saler.

“We said, ‘ Even though you work for our com­pany, work with one of our lo­cal bro­kers, and our lo­cal bro­kers will use us or one of my com­peti­tors. What­ever is best for the con­sumer,’” Ish­bia said. “I re­ally be­lieve in bro­kers that much that I want them to orig­i­nate my own team mem­bers’ loans.”

UWM ser­vices most of the loans it funds and af­ter clos­ing, the bro­ker’s name ap­pears on ser­vic­ing state­ments as the bor­rower’s con­tact for re­fi­nance or new loan in­quiries. When it does sell ser­vic­ing rights on sea­soned loans, it takes mea­sures to help bro­kers stay con­nected with bor­row­ers by re­quir­ing the new ser­vicer to sign non­so­lic­i­ta­tion agree­ments that are in ef­fect for one to three years.

The move is not with­out its down­sides for UWM. The non­so­lic­i­ta­tion agree­ments are hard to en­force and could po­ten­tially af­fect mort­gage ser­vic­ing rights pric­ing. But the agree­ments have so far been re­spected and Ish­bia said they’re worth their weight in re­la­tion­ship build­ing with bro­kers. “There are peo­ple that won’t buy our ser­vic­ing be­cause of it and that’s OK. Peo­ple could pay me a lit­tle worse price be­cause of it, po­ten­tially,” Ish­bia said.

And the strat­egy could be­come a more sig­nif­i­cant dis­tinc­tion between UWM and de­pos­i­to­ries that of­ten get into whole­sale lend­ing be­cause of the op­por­tu­nity to cross-sell to bor­row­ers. Cit­i­zens Bank, for ex­am­ple, re­cently pur­chased Franklin Amer­i­can Mort­gage (see page 8), a non­bank lender and ser­vicer ac­tive in both the cor­re­spon­dent and whole­sale chan­nels.

But over­all, banks are still largely stay­ing clear of whole­sale. The chan­nel rep­re­sents only 3% of large banks’ orig­i­na­tion vol­ume, ac­cord­ing to the MBA and Strat­mor.

“The eco­nomics make a lot of sense for banks. The tricky part is the reg­u­la­tory pres­sure,” said Strat­mor Se­nior Part­ner Garth Graham. “Bro­kers are in­de­pen­dent con­trac­tors. You can have rules, you can have guid­ance, but it’s very hard to man­age the risk.”

In­deed, some lenders are ex­per­i­ment­ing with whole­sale and then later find­ing that they are “not sure they want to be in the busi­ness,” said Tyler House, man­ager of ad­vi­sory ser­vices at mort­gage in­dus­try con­sul­tancy Richey May.

For now, though, the prospects for whole­sale lend­ing look strong. “We be­lieve the mar­ket con­sol­i­da­tion is go­ing to re­sult in a few things. Smaller, lightly cap­i­tal­ized mort­gage bankers are go­ing to take their cap­i­tal off the ta­ble or they are go­ing to sell out to larger play­ers,” said Graham. “And I think some of the big ag­gre­ga­tors are look­ing at the whole­sale chan­nel and say­ing, ‘ I like the vari­able cost model.’”

Ul­ti­mately, the in­creased com­pe­ti­tion won’t be easy for UWM to con­tend with, but Ish­bia does see an up­side.

“It’s not about UWM thriv­ing, it’s about the chan­nel thriv­ing, and if the chan­nel thrives, UWM will thrive.”

“Bro­kers are in­de­pen­dent con­trac­tors. You can have rules, you can have guid­ance, but it’s very hard to man­age the risk.” — Garth Graham, Se­nior Part­ner Strat­mor Group

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