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National industry appointments update - 07/06/2006
New research about mortgage brokersTom LaMalfaWhat is a mortgage broker?
Wholesale Access recently published "Mortgage Brokers 2004," our
seventh major examination of the mortgage brokerage industry since
1991. This article reviews the broker studies, their focus, what we
learned, their methodologies, statistical validity, consistency,
measurement, survey design and the objectives of the research.
The series began with "The Nation's Mortgage Brokers—Who
are they? Where are they? What do they do?" Study number two was an
examination of the economics of brokering mortgages, "The Cost of
Origination—Are mortgage brokers the low cost producers?"
That research was completed in 1992. The third study was completed
in 1995. It looked at how mortgage brokerages were adapting to a
major downturn in origination activity. There had been a tremendous
wave of refinance activity in late 1992 through 1993 that swelled
production. We wanted to know how brokerages were fairing, coping
with a near 40 percent drop in originations between late 1993 and
mid-year 1994. Studies four to seven were cleverly titled "Mortgage
Brokers 1998," "Mortgage Brokers 2000," "Mortgage Brokers 2002" and
now (big surprise), the latest—"Mortgage Brokers 2004."
The serials all focused on five areas of the brokerages'
business and industry: technology, wholesalers, operations,
products and demographics. The technology section examined in some
detail the software used, automated underwriting system (AUS) usage
and use of the Internet. The section on wholesalers looks at who
brokerages sell to, in what quantity/ranking and why. The
operations section deals with sourcing business, locking, loan
officer splits, overages, document preparation and closing. The
section on products looks at five loan types: agency (conforming),
jumbo, alt-A, FHA/VA and sub-prime. Here, our interest as
researchers was longitudinal—how is the product market
changing over time? The final section addresses demographics: where
brokerages are located, production volume, number of employees,
brokers' educational backgrounds, association affiliations, what
publications brokers read, etc.
So, what did we learn?
The complete answer takes 380 pages of statistical tables, analyses
and addendums. However, key highlights would include the
following.
First, we estimate that 53,000 brokerage firms were operating in
2004. (Wholesale Access uses the term broker to mean the firm's
owner[s]. Some brokerages have three or even four partners or
co-owners.) In 2002, we counted 44,000 firms, 17 percent fewer than
two years earlier.
Second, brokerages are getting smaller. Since 1998, the mean
firm size slipped from 9.3 to 7.9 employees, while the median has
declined from five to four employees. Back in 1991, the median was
six employees. The industry's fragmentation and the smaller firm
size are particularly interesting because they contrast sharply
from most other industries where consolidation has
occurred—from banks to pharmaceuticals to defense
contractors. In most industries, firm size has risen—fewer,
but bigger banks for example.
The third important thing learned was that the brokerage
industry's market share was 68 percent in 2004. This was up three
percentage points from 2002's estimate. Brokerages' share of
residential originations has exceeded 60 percent every year since
2001. Their market share has been on the ascent since the late
1980s. In 2000, we had been expecting a pullback in market share to
about 50 percent for the brokerage industry in 2005. This obviously
hasn't occurred. The explanation for our failed forecast is that
refinance activity has held at historically high levels—about
50 percent of aggregate originations—and the product menu has
shifted, favoring the nimbler players. So a key question is: Will
the industry remain as competitive to account for two-thirds rather
than one-half of origination volume in 2006? More competition is
coming from real estate agents and homebuilders—the
traditional sources of business for brokers—who have been
increasingly setting up mortgage finance operations. Additionally,
the largest wholesalers are expanding their retail franchises
significantly. It appears that many more resources have been put
into retail channels in recent years by some of the largest
wholesalers. That suggests more competition coming down the road
for brokerages from wholesale lenders.
Worth discussing at this point is the brokerage study's
methodology and, importantly, its validity. All research is not
created equal. "Mortgage Brokers 2004" was a survey research
project. The only way to collect the data that we wanted was to ask
brokers what we wanted to know. We have to get them to want to talk
with our callers. To a group of 1,000 brokers, we asked 73
questions with multiple parts. To a second group of 1,500, we asked
16 questions. We made almost 70,000 calls to verify firm names,
addresses and phone numbers, thereby verifying and inventorying
approximately 45,000 (or 85 percent of our estimated 53,000)
operating brokerages. All surveys were conducted between February
and June of 2005. Except for the firms tested in the pilot phase,
all surveys were conducted by telephone of brokers chosen randomly
from a list of 53,000 firms. Respondents were assured of
confidentiality—another requirement in this type of survey
research. It was dialing for data from Wholesale Access' sampling
frame, an inventory of firm names, addresses and phone numbers
we've accumulated over the years. Wholesale Access frequently
inputs new names to add and purges the list with the goal of
keeping it up-to-date between studies. The number of surveys
completed per state was relatively proportional to the size of the
state market. Randomness is a critical factor in creating
statistical validity. Equally important is sample size. A random
number of about 350 responses to a single question get to the
minimum validity threshold. Having more surveys increases the
confidence level. As stated, we long-surveyed about 1,000
brokerages. Statistical validity is necessary in order to have data
that can (if needed) be used in regulatory, legislative and
judicial settings to explain the business and industry to laymen,
whether media, congressional or other. Indeed, only statistically
valid studies are of any value from a decision-making perspective.
Non-random surveys and surveys that are not well defined are near
useless or should be for decision makers. For example, the recent
Campbell/Inside Mortgage Finance (IMF) broker survey is voluminous
but not statistically valid, since anyone could answer
it—whether a broker or not—and there could be multiple
respondents from the same firm. Most of their respondents were
individual loan officers, whereas our respondents are the owners of
the firms and their answers reflect the volume for that firm. All
of the answers are then weighed by the volume of each firm.
Wholesale Access is highly focused on the ideastream that
emanates from collected and compiled data. Most importantly, are
the findings consistent over time and from study to study, as well
as with other research? What's the story? How volatile is that main
story? Does it make sense when juxtaposed and examined against the
observed, non-empirical market environment?
Having mentioned IMF, it is important to note that the mortgage
publication measures broker business differently than Wholesale
Access. We ask who took the application from the borrower and
processed the loan. IMF (and National Mortgage News) tallies from
lenders the amount of business coming through each of three
production channels. This method of measuring overlooks the
originations of brokerages that land in the correspondent and
retail channel columns. The latter two channels aren't pure by any
stretch. Brokerages originate loans that get counted in each of
these channels. Our research over the years indicates that about 50
percent of the business counted in the correspondent channel and 20
percent of the business counted in the retail channel was actually
originated by brokerages. They were at the point of sale taking the
borrower's (or refinancer's) application and processing the loan
while determining to which wholesaler the loan should be sold.
I'll conclude with some thoughts on survey design and our
collective objectives from the research. First, according to Peter
F. Drucker, America's management guru and the so-called "Sage of
Claremont," the two most important types of research for firms in
an industry are customer research and market research. Customer
research is assembling a database about the customer, his
likes/dislikes, etc. Market research involves developing a database
about elements of the marketplace—of products, lenders or
technology, for example. "Mortgage Brokers 2004," like its
predecessors, was designed to provide databases about customers and
markets. Moreover, the studies also include an evaluative analysis
component. Major wholesalers can measure how they are viewed by
brokers in an array of areas and how brokers view their major
competitors. For instance, Countrywide can ascertain what brokers
report about them as well as about Wells Fargo or InterFirst, etc.
So, customer data, market data and competitive analysis are baked
into the cake.
Our second goal was to provide data and useful analysis to a
half dozen functional areas within the wholesaler's firm. As a
result, data is collected for production, for the information
technology department, for operations, for strategic planning, for
marketing, for legal and, of course, for senior management. For
example, the technology and Internet section of the survey
instrument asked: How does the brokerage use the Internet to
communicate with borrowers and lenders? How do they decide what
loans get submitted to which AUS? What loan origination system and
customer relationship management software they use? Information
technology personnel don't have to make systems integration
decisions based on anecdotal information, quick and dirty surveys
of five or six of their firm's brokerage customers or guesstimates.
Hard data is available.
The report also measured the volume of loans by all of the major
mortgage wholesalers in the industry, as well as the perceptions of
service given by these wholesalers to their brokers. All of this
data was consistent with our studies of lenders and the HMDA
database. We make sure that all of our research is mutually
consistent to double check its validity.
I would like to thank the firms that gave us the funds to do the
study: American Home Mortgage, American Mortgage Network, Bank of
America Mortgage, Bernstein-Rein Group, Calyx Software, Chase Home
Finance, Citicorp Mortgage, Countrywide Home Loans, Ellie Mae,
Fannie Mae, First Magnus, GMAC/RFC, HSBC/Decision One, IndyMac
Bank, InterFirst/ABN Amro, Loan City Mortgage, MGIC, National City
Mortgage, Scotsman Guide, SunTrust Mortgage and Wells Fargo Home
Mortgage. We can't bring good, solid data to the industry without
your continued support. Thank you.
Tom LaMalfa is co-founder, partner and managing director of
Wholesale Access Mortgage Research & Consulting Inc., which
focuses on mortgage finance and does market structure studies,
production revenue, expense benchmarking, multi-client projects and
proprietary research. He can be reached at (216) 752-6610 or e-mail
[email protected].
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