In mortgage circles, the question of “Mortgage broker or mortgage lender?” is a matter of passionate debate equal to the questions of Keynesian Theory among economists, or the designated hitter among baseball enthusiasts. Perhaps some opinions have been changed due to the disruptions seen in housing finance in recent years. One thing is clear, a dramatically changed mortgage marketplace has been cause for many to reconsider this question.
For many years, the path of the mortgage broker had tremendous appeal for many excellent originators. With low barriers to entry with a relatively inexpensive opportunity to build a business, the broker path offered the autonomy to operate a business according to one’s own recipe for success. With limited loan quality risk, the broker could be a dedicated and strong voice for the consumer. With a seemingly endless supply of wholesale lenders and products, the broker could shop for the best price and program to meet the consumer’s need. With so much competition for their business, there was always an outlet to place a borrower’s loan. The mortgage broker needed to worry little, if at all, about warehouse bank relationships, secondary market management, loan quality audits and compliance management. These were distractions that interfered with the higher value-added activities of marketing, brand building, and passionately servicing the customer.
While crisis in the financial markets and an avalanche of new regulation have been felt industry-wide, irrespective of your broker or lender status, there seems to be no question but that it has been more disruptive to the mortgage broker. In 2010, RESPA reform clarified by statute the requirement for mortgage brokers to disclose to the borrower the yield spread premium they received from the wholesale lender. The Loan Originator (LO) Compensation regulation of 2011 mandates that brokers must disclose a minimum of three loan options to the consumer to be in “Safe Harbor,” while also prohibiting the collection of dual compensation from both the consumer and the lender. And, in January of 2014, Qualified Mortgage (QM) regulation will require that the mortgage broker include the compensation they receive from the wholesale lender in the three percent points-and-fees test under the Ability-to-Repay statute. It seems reasonable to assume that QM will have a continuing effect of placing pressures on margins as wholesale lenders reduce broker compensation to meet the points-and-fees test.
As a mortgage banker, I won’t pretend to have an unbiased opinion on this matter of broker or lender. I think it is clear that much of the regulatory attention being paid to the industry (both positive and negative in terms of its impact on the consumer) is intended to consolidate the industry, thereby making it easier to monitor and oversee. Rather than deal with the unique impacts of new statute, the complexities of ongoing regulation, and the margin pressures on business economics, many brokers are making the transition to a mortgage lending platform. For those who are mulling this decision, there are a few things to consider that are imperative to a successful transition.
Unless you are acquiring a mortgage bank with established investor and warehouse relationships, deep domain expertise in lending compliance, the latest technology, and a growing net worth, your option to being a mortgage lender is limited to joining an existing Independent Mortgage Bank (IMB) with these infrastructures and relationships already in place. While this choice may eliminate some of the management autonomy that many mortgage brokers value, there are many great IMBs with much to offer a mortgage broker intent on making a change.
Finding the right organization to join is the first step. There are many different IMB business models from which to choose. Understanding the choices begins with completing a due diligence on the things most important to you. But, your needs evaluation must also acknowledge the business model additions and changes that are imperative to success in the new mortgage economy. I recommend you consider the following questions as you evaluate your choices:
1. What are the capabilities of the organization, both in the form of financial capital and business development, to support your growth plans and vision?
2. Does the IMB have the compliance management systems and structures that will allow you to successfully navigate an increasingly complex regulatory environment? Can you trust the organization’s compliance competence to protect you?
3. Does the IMB have the training structures and resources to quickly learn new manufacturing workflows, new technologies, new policies and procedures, and new compliance expectations?
4. What kind of on-boarding process and resources will the IMB provide to help transition your existing team in a seamless way?
5. What kind of product and program choice does the IMB offer? Do they have the ability to retain servicing, and create their own products? Does it have a variety of investor relationships as a hedge against the exit of any one investor? And, where it doesn’t have a needed product through correspondent channels, are there wholesale lender options to complete the product need required by both borrowers and referral partners?
6. If the IMBs business model requires you to manage a P&L, what training, financial tools, and financial analysis support does it provide? Does it provide regular and real-time financial reporting?
7. Is the organization selective in evaluating who it brings on, and do they have a well-defined growth plan?
8. Do the core values of the organization you are considering align with your own? If your core values don’t match their core values, there’s a much higher probability of frustration and failure.
Finally, I might share a few best practices once you have made your choice to retire your mortgage broker credentials in favor of a mortgage banking platform. First, be fully invested and committed to the change. Inevitably, there are going to be growing pains and learning curves. Any organization who tells you otherwise is either selling a bill of goods, or doesn’t have much experience in helping mortgage brokers make such a significant transition. Second, be prepared for the fact that while you are likely to give up some of the way you’ve done things as an independent mortgage broker, you are going to gain much in the way of capability, organization access, industry connectivity, domain expertise, and a backroom equipped with new resources committed to your growth and success.
Chris Jones is senior vice president of business performance for Primary Residential Mortgage Inc. (PRMI). In his role as senior vice president, Jones oversees the PRMI’s enabling process organizations, including finance, human resources, IT, software development, branch relations, business development and marketing. He may be reached by phone at (801) 596-8707 or e-mail
[email protected].
