With the news of Wells Fargo departing wholesale and the likelihood of an annoying media response, I could not help but again voice some reason into the industry with another sequel into part three of this series. Net branch recruiters, branch managers, and wholesale naysayers, wipe that drool off your mustache for just a moment and let’s discuss the important facts that so many tend to misunderstand or not fully comprehend.
Some of you may have read my prior articles on this topic that started in the first quarter of 2010 during RESPA reform and followed up on around loan originator (LO) compensation changes in 2011. Since that time and nearly three years, later my assumptions and predictions have come to fruition from the trends and behavior in the industry. To restate my position again, I support all forms of mortgage origination on every channel, if run with integrity and strong business ethics. I feel that competition is vital for the consumer. With that said, my articles and opinions tend to lean more in support of the wholesale small business mortgage broker as someone who lives and breathes it daily. We’ve taken an unjustified beating in the media and it can get a little annoying.
My passion for wholesale lending has always been driven by what it can offer to my clients and my business that other channels simply cannot. More recently, my passion for wholesale has been fueled by the deception and inaccuracies from recruiters and others in our industry motivated by a self-serving agenda, and my goals of exposing them. The problem is that these people are making invalid assumptions on something they no longer understand. Wholesale has gone through unprecedented change from the way it was, as have the other origination models. The primary difference is that mortgage brokers understand other operational channels and how they operate, but they no longer understand our channel after financial reform and the mass exodus from the wholesale marketplace.
We are seeing a trend across the nation. The newly-appointed Consumer Financial Protection Bureau (CFPB) has divided the industry by banks and non-banks (or depositories and non-depositories) when it comes to federal regulation and the internal departments assigned to each. Another trend has been with large depository lenders exiting the wholesale lending space. This comes from the difficulty in hiring staff, corporate priorities, less profit, etc. The recent departure of Wells Fargo was due to the firm facing these similar constraints and no longer finding reason to continue wholesale operations as only five percent of their business. However, the comments regarding fair lending by third-party origination (TPO) production alone is ludicrous from those of us who know the facts.
“Just because you don't understand it doesn't mean it isn't so.”
The departure of Wells will be similar to other big bank departures. Sure, it’s concerning based on the continued restriction of options for the consumer, but overall, it changes very little. There are many other wholesale lenders that will pick up the volume and see new opportunities, many of which are still utilizing Wells and the others through the correspondent market. I have seen more wholesale lenders enter our marketplace in 2012 than any other previous year in my career. The reason for this is that wholesale lending is still the most cost-effective way for a creditor to bring their product to market.
As long as correspondent lending is here, wholesale lending is here. These origination channels are married … until death do them part. The only difference between retail correspondent and wholesale correspondent is that one employs the originator and the other does not (unless under different departments). I feel this is an advantage to the mortgage broker for more product choice, comparison on execution, competition and control in pricing, and primarily, lack of buy-back risk and significant overhead which is growing under new regulatory changes. We all rely on banks and correspondent lenders, and I am personally appreciative of their support partnership, but exposing the ignorance in retail mortgage origination is important for growth.
Common sense is defined by Merriam-Webster as, "sound and prudent judgment based on a simple perception of the situation or facts." Here are a few common sense principals that relate to retail correspondent and wholesale lending down to the originator level in the primary market:
►Wake up bankers, you are not a bank.
You are not a “direct lender.” You’re an “indirect lender.” Borrowing money from a bank does not make you a bank. Think short and soft about that. Retail correspondent lending has had an identity crisis for several years using the term “mortgage banker,” when in reality, they don’t fall within the definition of a bank at all. What’s worse is that they actually use this title as a primary sales tool when promoting their services. As defined by a dictionary as well as our federal regulators as a “non-bank,” I would not be surprised if the CFPB bans the use of this term for retail correspondent originators. It’s not really a big deal until naive borrowers and real estate agents believe this false representation as being a benefit to them.
►It’s all about systems.
If you want to excel and execute your loan files, you must have effective and compliant processing systems. We are in an agency-run world with the government-sponsored enterprises (GSEs). How you get from Point A to Point B means nothing if you cannot execute and you’re judged by your performance and pricing, not by your title. There are good and bad operations in both retail correspondent and retail mortgage broker firms, but it’s not about the channel in which the loan is originated, but the systems that control turn-times and defines the consumer experience.
►We are in a transactional-based industry regarding revenue.
If you don’t close loans, you don’t get paid. If the company doesn’t close loans, they go bankrupt. We don’t have the perks of residual or passive income in the mortgage industry. Fees and revenues are earned by upfront origination fees to the consumer, and/or service release premiums (SRP)/yield spread premiums (YSP) paid to the creditor through above market rates on closed and funded loans. It’s that simple. If you’re not producing as a mortgage loan originator, than chasing a comp plan or short-term base income by jumping around originating platforms will not make you successful. Five-hundred basis points of zero is still zero … you simply need to close more loans.
►Higher overhead means higher rates and fees.
The highest fixed costs most companies face is obviously payroll. If you have processing staff, front desk staff, underwriters, compliance managers, non-producing branch managers and owners, minimum asset requirements, etc. where do you think this money come from? While we wish there was a money fairy flying around sprinkling their money dust all over our balance sheets, it’s not going to happen unless the company closes more loans directly through loan originators. Higher SRPs and higher rates and fees will always accompany higher overhead or an owners profit goals.
►There are companies that need originators and companies that want originators.
There is a wrong way and right way to attract talent. Recruiting can be necessary, but it can also be annoying if fear-based methods are used. The years 2008 and 2009 showed us the worst wave of fear-based and unprofessional recruiting I have ever personally seen. It was tasteless and destructive. It’s vital that mortgage originators get better educated in this business to make better choices and not be influenced by those using to choose these methods. I have seen several ruin their career and miss out on huge opportunities for taking the bait. Non-producing owners need mortgage originators to pay for their salary and the salary of any non-producing employee. Get it? Congratulations, you’re a job creator, call your Congressman and tell them you’re awesome.
►Higher compensation means higher rates.
Overhead is the base factor in your rate sheets, but the other major adjuster is compensation. Whether working for a correspondent and negotiating a comp plan or working for a mortgage brokerage firm negotiating comp plans with wholesalers, the compensation is built into the SRP or YSP when it comes to the rate sheet you offer to your client. If one has lower rates and the same or higher compensation plan, they simply have lower overhead or require less revenue as a company (assuming they are paying the bills and are in the black).
►Up-selling rate is old school sub-prime thinking.
I hear it all the time, non-producing managers telling loan officers to sell value and service as an answer to losing business to others. Listen, value and service is a requirement for everyone. Rate is simply determined by the bullet points above. Rate may not be everything, but you need to be a player in the market. You’re not going to sell the same Fannie Mae 30-year fixed at a 0.25 percent higher rate than another strong competitor with experience. Consumers are getting smarter, at least the type of consumers you want to attract. Why up-sell rate when it’s not necessary? Pay attention to the market and know where you sit.
►Local is better.
In an industry involved with the largest financial decision a consumer will make, impacting their personal balance sheet considerably, being locally based matters. Having a local presence and understanding of the marketplace and its consumers is very important for any business in our industry. Local mortgage brokers and correspondent lenders are vital to consumers in the mortgage market and we always need to protect diversity and choice for a healthy and balanced competitive environment.
►The terms “banker” and “broker” are dead, at least the way we perceived them.
We are simply “mortgage loan originators.” Times have changed and we all need to adapt to our new mortgage generation. These titles make absolutely no difference to anyone, including the consumer. Even our President and regulators are confused, calling bank loan officers “brokers.” No more smoke and mirrors and it’s time we work together as “non-depository mortgage professionals.”
When rates increase and/or when volume decreases, the comments above will make more sense to those originating. Refinances account for approximately 70 percent of current loan transactions nationally, and everyone is either too busy or not paying attention to the details to put things in perspective long-term. Since 2009, we have logged the highest quality of mortgage loans in our history. I strongly believe that correspondent and wholesale lending has a bright future, but not without effort from all of us to fight bad policy and block unintended consequences of proposed regulations.
Heavy regulations and changes are still to come. Much pressure is being applied to banks and creditors under the Dodd-Frank Act which can and will negatively impact all origination channels and consumers as we all know too well. Stay informed with the CFPB, get involved, and learn on your own rather than from someone else financially interested by steering your beliefs. Our industry needs more good people stepping up to represent and protect our livelihood and the consumers we serve. When a person genuinely enjoys their profession and are motivated by their passion, they tend to be more satisfied with their work and more psychologically healthy.
Andy W. Harris, CRMS is president and owner of Lake Oswego, Ore.-based Vantage Mortgage Group Inc. and 2010-2011 president of the Oregon Association of Mortgage Professionals. He may be reached by phone at (877) 496-0431 or e-mail firstname.lastname@example.org or visit AndyHarrisMortgage.com.
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