It’s no secret that these have been tough times for the mortgage industry. When the real estate market began its meltdown, everyone pointed fingers: Was it the fault of the Realtors? The lenders? The brokers?
Needless to say, the brokers took the brunt of the criticism and became a scapegoat of the market crash. Brokers were getting a bad rap, making it more difficult to be a serious option to customers. Federal and state regulations were becoming more stringent so brokers were required to do more paperwork and find new approaches to their work. If that wasn’t enough, it started to become more clearer that lenders were going to cut back on the number of brokers they used—or stop using them altogether.
It was obvious there were going to be big changes ahead for our industry. To a certain extent, it was inevitable. But how is a mortgage company to survive, let alone thrive, in this kind of environment?
The first step is to accept the changes on the horizon. Mortgage companies that are running a clean and reputable operation should be able to adjust and move with the market. But flexibility is key, and in some cases, changing with the market could mean changing your business model altogether.
One way to do that is to become a direct lender. If the brokers become the lender, they can offer more options and better service to their customers and help insure that they won’t be shut out by lenders. But with a major change like this comes many daunting challenges, from learning to do business on a new software system, to educating employees that the shift is a positive one and not negative.
There are several ways to become a direct lender and adapt to today’s economy. Each one has its own pros and cons. Here are a few of the options:
►Buying a bank: A federally-chartered bank can operate in all 50 states without being licensed in all of them, which means nearly six figures or more than $65,000 in savings per licensed mortgage broker per year. This can add up to an enormous annual savings for a mortgage company, depending on the number of states in which they do business. Also, some banks are in trouble and the Federal Deposit Insurance Corporation (FDIC) wants them cleaned up, which also makes this an attractive option. The downside to this option is that, no matter how well-capitalized a mortgage company is or how much the deal will help the bank, regulators may not allow such a deal to move past initial conversations because in the end, they often do not want to see a mortgage company buy a bank.
►Starting a bank: This option requires a large amount of capital to get started ($15 million-$30 million). It is also very difficult and extremely time consuming to get approved by federal regulators.
►Applying for your own Full Eagle FHA direct lender license: This is incredibly difficult to pursue from scratch because in order to meet the criteria required for federal approval, a company needs experience, infrastructure and a back-office among others. Approval can take a long time to obtain and the process can be extremely time-consuming.
►Becoming a branch of a federally-chartered bank: By doing this, the mortgage company becomes part of the bank. The benefit is that the mortgage company becomes a direct lender, but the downside is that the mortgage company owners must essentially walk away from their company and hand ownership over to the bank.
►Consolidating or merging with an established direct lender: A direct lender will already have the infrastructure and warehouse capacity in place to offer a variety of loans. Ideally, the mortgage company brings additional state licensing to the table, as well as the ability to bring in a larger volume of customers. This option requires a lot of legwork because the mortgage company will have to apply for lender licenses in every state in which they operate, and all the licenses must become effective at the same time in order to close on the merger.
Merging with a lender involves lots of lawyers, state licensing agencies, paperwork and meetings, meetings and more meetings. That’s after finding a strong candidate for a merger. One place to look for a partner is through a trusted compliance and regulatory attorney. Just as they work to keep the mortgage companies in compliance, they may also know of an FHA Full Eagle direct lender who runs a clean operation and is looking to make a change or expand.
With a merger or any of the other options, shifting from mortgage broker alone to both broker and direct lender will require compliance and software updating, training all employees on the new systems and—perhaps the most challenging change—a major shift in corporate culture.
The broker mentality used to be, and for some still is, that there are an infinite number of lenders to go to try to get the loan approved and the product mix is diverse. The broker’s approach is focused on the sales cycle, as well as analysis and collection of data and documentation, but not necessarily the final underwriting or decision.
But when a mortgage company becomes the lender, its employees must look at every loan and every borrower differently, as if they were lending out money from their own pockets. This can be a challenge for processors and loan officers who are more accustomed to moving quickly through high volumes of loans and having numerous options of lenders with whom they can broker a loan.
It is also a difficult adjustment for brokers who are accustomed to shopping around for the lowest rates and best deal to fit any situation, to now find themselves limited to one rate sheet and only the loan products that their company offers. But it is important to remind these employees that, on the upside, they can work more efficiently, spend less time searching for the best product and close deals faster.
Still, it is a tremendous challenge for the culture. Making the shift takes lots of phone calls, meetings, discussions and even lots of arguing. It takes a lot of repeating the same message over and over and over again. It means reminding employees that it is no longer an option to go somewhere else because the rate is slightly better or because one lender didn’t approve a loan, but that they can talk to the underwriter and all the people who will handle their loan from beginning to end or from origination to close. And reminding them that this is a good thing because the loan is controlled in-house and they can close loans faster.
It also means making compliance changes: Figuring out what new documents and disclosures will be needed as a direct lender to close a loan, what a loan submitted from an originator will look like and how to streamline the process of submissions. A new software system may also be required to move loans through the system in a succinct and cohesive manner.
Then, the mortgage company must work hard to educate its employees about the procedures necessary to close deals and train them on new software systems, while assuring them that with every loan going through the same software package, workflow will improve.
It may take lots of Webinars, conference room training sessions, coaxing and coddling to make them see these the positives, but as employers, it is our job to show it to them. When a mortgage company also becomes a lender, a lot of new, scary things are thrown at the employees, but new and scary can also be very good.
As the shift takes place, many brokers will likely realize they want to work with a mortgage company that is also a direct lender. And even with the change, their job will remain much the same: Locking loans, submitting loans and addressing conditions on loans.
In the end, some employees will leave, while others will stay. Some new ones may also come along. Many will recognize that there are not many other options out there because there aren’t many brokerage firms left these days. They will likely recognize that change is a good option, and in this market, it may be the only option.
Joshua Shein is chief executive officer of 1st Maryland Mortgage Corporation d/b/a Great Oak Lending Partners in Timonium, Md. He founded the company more than nine years ago and recently led Great Oak’s merger with 1st Maryland Mortgage Corporation, which made the company a FHA Full Eagle direct lender. He may be reached by phone at (443) 901-7617 or e-mail firstname.lastname@example.org.