They are all gone. One by one, the major banks in the U.S. have announced their exit from wholesale mortgage banking. It began with Chase in February of 2009, continued with Bank of America/Countrywide in 2010, and finished up this year with Citi in February and Wells Fargo in July. What does it all really mean? Is wholesale mortgage lending doomed for failure if the biggest banks in the land don’t view it as important enough to continue? I contend that the future of wholesale mortgage banking is actually quite positive … let me explain.
First: Banks are unique financial institutions with unique motivations
Wholesale mortgage lending was never a good fit for the big banks, and it has become less so over time. Whether it was the historic focus they have placed on their retail channel and their current need to support the retail channel with maximum available resources, the need to achieve greater cross-sell results, or the desire to reduce liability, the big banks can no longer justify participating in this segment of the “new mortgage origination industry.”
What do I mean by “new mortgage origination industry?” Simply put, in the post-real estate bubble, post-sub-prime collapse, post-foreclosure tsunami, post-financial firm bailout world, the mortgage industry has evolved in ways that are reshuffling the deck of players. Whether it is the Basel III bank capital standards, the repurchase risks of loans previously sold to Fannie Mae, Freddie Mac and Ginnie Mae, or the regulatory burdens and risks imposed by Dodd-Frank Act and the rule-making and enforcement of the Consumer Financial Protection Bureau (CFPB), the evaluation that banks must make of all their activities has fundamentally changed. Wholesale mortgage banking simply doesn’t pass the test for large banks any longer.
Second: Remaining mortgage bankers will build a better wholesale industry
The remaining mid-sized mortgage bankers are far better suited for building a sustainable wholesale channel than the big banks. This is because they tend to be regionally based and treat brokers and their clients with a great sense of care, because mortgage loans are their only product. This regional focus and co-dependency between brokers and bankers will produce highly productive and highly efficient relationships.
As the “new mortgage industry” continues to evolve, non-depository mortgage bankers and their broker partners must continue to find new and innovative ways to provide consumers with a superior lending experience. This will likely include more personalized service focused on a detailed assessment of the consumer’s financial needs and maintenance of the historic advantages of maximum choice at minimum cost.
Third: The wholesale channel will produce high-quality loans
Committed mortgage bankers, experienced mortgage brokers and a new regulatory framework will combine to ensure that high quality loans will be originated. With the removal of sub-prime and high-risk products from the market, the clarification of compensation arrangements for loan originators and the careful vetting of mortgage originators and brokers, the quality of loans produced in the wholesale channel should equal that of those produced in other lending channels.
One of the hallmark concepts of financial quality control in the financial services industry is to “know your customer.” I believe that mortgage brokers have always been in the best position to do that given their proximity to, and shared interests with the consumer. Now with closer relationships with regional mortgage bankers, who are incented to assist their broker partners to meet higher standards, quality production will improve.
Of course there is much pending on the regulatory front that will impact the wholesale market going forward. In particular, the upcoming decisions related to defining what a qualified mortgage (QM) is, and what degree of safe-harbor will exist for originators and purchasers of such loans, will bear heavily on the market. Additionally, the ultimate fate of Fannie and Freddie, and the form of backing of the secondary mortgage market by the U.S. federal government, will impact the wholesale channel’s future to a significant degree.
So those of us who are stakeholders in the future of the wholesale mortgage banking channel need to remind our colleagues, clients, political representatives and regulators of the advantages our businesses continue to provide for consumers, including:
►Maximum selection of loan programs
►Competitive pricing due to multiple loan sources
►Ongoing process improvement due to flexible technology posture
►Local real estate market knowledge and expertise
►Relationships within the local financial services community
These advantages that wholesale lending provides for consumers will ensure that politicians and regulators will preserve a position in the mortgage origination space for wholesale lending.
John Walsh is president of Milford, Conn.-based Total Mortgage Services. John founded Total Mortgage Services in 1997 with a customer-centric approach and a mission of responsible lending. He may be reached by e-mail at JWalsh@TotalMortgage.com or visit TotalMortgage.com.