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So you want to originate FHA loans? An update on HUD eligibility requirements

National Mortgage Professional
Jun 23, 2005

A New Breed: Mortgage Industry Veterans Are TalkingMichael Knightwarehouse lines, paradigm shifts The phone rings. "Hi there, my name is Jon, and I can help you become a mortgage banker." I have received four calls just like this within the past three weeks, coming from mortgage veterans who realize the current paradigm shift that will eventually squeeze a majority of mortgage brokers out of business. In the dawn of mortgage brokering, brokers had zero market share, which quickly matured to a ripe 65 70 percent that others are now attempting to take away. In essence, with our success also comes some problems, and mortgage brokers have garnered their fair share of attention from new industry participants, joint ventures and, most recently, a regulatory environment intent on squelching that achievement. With all of these challenges, a new cottage industry of "mortgage consultants" has smelled opportunity. This new consulting breed of industry veterans has spotted the latest trend, a paradigm shift, and is capitalizing on all the forces reshaping the mortgage broker industry. A consultant may sound like the easy answer, but they come at a hefty price. The ones who contacted me gave initial quotes from $35,000 to $50,000, and one estimate came in at a lofty $85,000. Clearly, today there is definite recognition that the journey from broker to banker is not only necessary, but advantageous if the right choices are made. However, there are a few problems that lay beneath the surface if you decide to work with a consultant of this type. Get a Warehouse Line No consultant in the world can change the warehouse line qualification process, which is one of the ways to convert from broker to banker and still remain independent. To qualify, a broker must have good credit and considerable liquid net worth in their business in order to close loans in their own name as a mortgage banker. A small percentage of mortgage brokers can meet the rigid qualifications. Also, it will take an experienced warehouse manager to run your warehouse line, which means one more person on the payroll and you are still left with all of the inherent risks. So, before you hire a consultant, it may be best to first find out if you can meet the minimum requirements to obtain your own warehouse line. Join a Net Branch Net branching is an entirely different avenue in which a broker can become a banker. The need for consulting services is minimal but does boil down to educating yourself on the many net branch companies out there and then choosing one to work under. Generally speaking, net branches will absorb your mortgage company, require you to change your name to the net branch name, use their systems and processes, and you become an employee/originator. Gone is your name, independence and company, but in return you gain access to different loan programs, some benefits, warehouse line. If you are willing to give up all of these things, plus any equity you had accumulated in your company in return for the net branch benefits, then net branching may be your ticket. Join a National Mortgage Partnership The last, and, in my opinion as an independent mortgage broker, the most robust and lucrative banking option’±is a partnership model that transforms brokers into bankers with little day to day disruption. This is a perfect example of an emerging company spawned by a paradigm shift. Mortgage broker/owners who join this partnership are paid for their participation and their years of hard work. This is contrary to all other options that require mortgage brokers to pay some sort of membership fee for their participation either through initiation fees (co ops) or ongoing per file charges (net branches). In the partnership model, mortgage brokers are also able to keep their valuable company name and total operating autonomy. In addition, the partnership model offers these unique perks: *A warehouse line without having to manage it or take any of the risks yourself; *New channels of revenue; *Sharing of best practices with elite mortgage partners across the country; *Real estate agent incentives; *Fortune 500 benefits; *National branding and marketing; *Stock; *Stock options; *Incentive stock options (ISOs, which function like a profit sharing plan); and *Retirement/exit strategy. As with this and all paradigm shifts, industry leaders who had little market share under the old business model, emerge with a much more sizeable piece of the pie. These companies are pioneers on the fringes, who went about their entrepreneurial way to explore new models, while the rest of the industry players, who had the most invested in the old way of doing things, woke up and said, "What happened?" There is a man named Joel Barker who refers to himself as a "futurist." He is a corporate trainer who speaks to Fortune 500 companies about the dangers of getting caught in "paradigm paralysis," causing companies to literally "miss the boat." He calls this the going back to zero principal, whereby these new pioneers come out of nowhere and end up with a dominant market share, while established industry veterans see their market share drastically diminish. The message here, of course, is to recognize what is going on in spite of how busy we have all been. You have to read between the lines of all the headlines about mergers, joint ventures, strategic marketing agreements, new entrants into the burgeoning mortgage marketplace, and the onerous regulatory environment that is being proposed by HUD? The edict is this, as recorded by Bob Dylan, "The order is rapidly fading. And the first one now will later be last, for the times they are a changing." Reality does not change when a paradigm shift occurs; in fact, reality can be a cruel awakening to those who closed their eyes to the obvious changes happening right in front of them. The best defense is the best offense, and the partnership model is leading the paradigm shift happening in the mortgage industry today. Will you be one to accept and ride this wave of change or will you be left fighting to keep the old way of business alive and in the course of doing that, wake up one day on the outside looking in? Will we, the independent mortgage brokers, collectively take control of our own future and apply what we know as leverage and strength in numbers to prosper during this change? The partnership model is saying "yes!" Michael Knight is Immediate Past President of the Colorado Association of Mortgage Brokers and CEO of Vanguard National Mortgage & Title. He may be reached by phone at (866) 875-6811 or e-mail [email protected].
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