At the beginning of this article, let me emphatically make this assertion … “As goes the future of Fannie Mae and Freddie Mac, so goes the future of the independent mortgage banker” and “As goes the future of the independent mortgage banker, so goes the future of wholesale and correspondent lending.” The answer to the question posed in the title of this article is, in my opinion, almost wholly reliant and depended upon the future of Fannie Mae and Freddie Mac.
Note: The definition of “wholesale” and “correspondent” first needs clarification: There is the East Coast definition of "wholesale” and the West Coast definition of the same … they can be very different. It is not uncommon for someone on the East Coast to use the words “wholesale” and “correspondent” interchangeably, whereas someone on the West Coast has a very clear distinction between the two. It happened to me again today as I was writing this article. I received a call from someone asking me, "Who is the biggest ‘wholesaler’ in the country?" Knowing that the caller was from the East Coast, I dug a little deeper to realize that the person really was asking, “Who is the largest correspondent lender in the country?" So as a way of clarification and getting our lexicons aligned for this article, “wholesale lending” is when a mortgage broker originates and processes a loan and then submits it to a lender for underwriting and funding. A “correspondent lender” is a company that purchases loans that have already been funded and closed.
The times, they are a-changing
Okay, this is going to date me at bit … I can still remember like yesterday way back in 1964 while in high school when the song, “The Times They Are A-Changing,” written and recorded by singer-songwriter Bob Dylan, shot to the top of the charts and in 1965 when The Byrds released their hit song "Turn! Turn! Turn!” No question, it was a time and a season when everything was changing. But the question I am going to explore now is how different were things back then compared to what they are today.
There have been dramatic shifts in the various business channels within our industry. The wholesale channel has fallen from its one time dominance of controlling as much as 65 percent or more of all loans originated, to less than 30 percent, and is anticipated to fall to below 15 percent. Correspondent lending has dramatically changed as well, with increased capitalization requirements, far fewer options to sell their loans at competitive prices, constantly changing credit overlays and generally anything but "business as usual" compared to a few years ago.
For the vast majority of those involved in the mortgage lending industry, life is far more difficult today than it was just 24 to 36 months ago, and certainly more difficult than it was 40 years ago … or is it?
Consider this … Fannie Mae, originally known as the Federal National Mortgage Association (FNMA), was created in 1938 by President Franklin D. Roosevelt as a part of the New Deal. I was amazed to learn that Fannie Mae was originally established as a government-owned entity for the two-fold purpose of reestablishing the nation's housing market in a post-Great Depression environment, and ensuring a reliable supply of mortgage credit throughout the country. And then, get this, in 1968, due to the fiscal pressures created by the Vietnam War, Fannie Mae was privatized, and by 1970, was a full-functioning, self-sufficient government-sponsored enterprise (GSE).
What I find so interesting is how history seems to repeat itself. The question is, "Are we learning anything from history?" Back in the late 1930s as our country was emerging from one of the worst financial crises of all time, President Roosevelt and the U.S. Congress found it necessary to form an entity to rebuild the housing markets. While maybe not yet as severe, how is that different from what we're experiencing today? And I am of the opinion that we have not yet seen the worst of this recession. With each passing day, it seems like the billions of dollars of stimulus money that have been dumped into the economy have failed to produce the desired results and our economy is not showing any convincing signs of a sustainable recovery. In fact, there is mounting evidence that this recession may have the dreaded “Double Dip" W-shaped pattern with the second “dip” being potentially worse than the first “dip.”
Think about it for a moment … Fannie Mae has returned to its roots as a government-owned entity at a time when that may be the best place for them to be. I can hardly believe that I'm writing these words in light of my deep-seated "free markets" convictions. Isn't it interesting that the original “two-fold purpose” for the creation of Fannie Mae is as relevant and “mission-critical” today as when it was established in 1938? While I don't share this view, many of the "anti-war" advocates attribute the genesis of our present day fiscal pressures to yet another controversial and unpopular war … this time, the war on Iraq and ongoing war in Afghanistan. Whether you share my views of "less government is better" or not, I challenge you to do as I have done to reconsider if privatizing the GSEs is a good idea in the near term and possibly even in the long term.
Finishing up of my history lesson, I also find it interesting that Freddie Mac, originally known as Federal Home Loan Mortgage Corporation (FHLMC), was formed by the Emergency Home Finance Act of 1970 to ensure that Fannie Mae did not monopolize the housing market? Did you get that? Emergency Home Finance Act of 1970! You mean to say that we had a home finance emergency back then? Does the movie title "Back to the Future” seem applicable again here?
Now consider some recent history … Do you remember, just a few years ago, the articles that were appearing in leading trade journals questioning whether or not we even needed Fannie Mae and Freddie Mac anymore? The rationale behind that discussion was that the secondary markets had evolved and had become so efficient, thanks to Wall Street, that we didn't need these two "evil twins" (as one trader referred to them) anymore.
But other than that brief insane aberration in mortgage history when a few ‘elites’ thought we could live without the GSE giants, it is unthinkable in today’s world to consider a healthy mortgage and housing climate without Fannie Mae and Freddie Mac or a very well-established equally strong equivalent.
Again, let me again emphatically state, “As goes the future of Fannie Mae and Freddie Mac, so goes the future of the independent mortgage banker” and “As goes the future of the independent mortgage banker, so goes the future of wholesale and correspondent lending.”
There is no one single driving factor more significant to this discussion about the future of wholesale correspondent lending than the future of Fannie Mae and Freddie Mac. Whether or not you agree with my opinion that things economically may get far worse before they are going to improve, there is no debate that our economic recovery will be through job creation and the recovery of the housing industry … all the result of a healthy and vibrant mortgage industry. In my opinion, this includes having healthy wholesale and correspondent channels.
So, how does this play out? Consider the first of two questions: “Who has benefited the most from consistently healthy, competitive and liquid secondary markets thanks to Fannie Mae and Freddie Mac?” While you might answer “everyone has benefited” which of course is true, no one has benefited more than independent mortgage bankers. By way of comparison, let's say for some reason a bank cannot sell their loans into the secondary market. They ultimately have their deposit base to fall back on for liquidity to carry them through whatever liquidity issues they may be experiencing. In other words, while banks benefited from having secondary markets, it hasn't been essential to their existence. On the other hand, independent mortgage bankers do not have a deposit base to fall back upon. Their very existence is directly tied to having consistent and immediate access to liquidity via secondary markets. So without question, it is independent mortgage bankers of all shapes and sizes that have been the primary benefactor of consistently healthy competitive secondary markets.
Second question … “Who, over time, has been the most active in the wholesale and correspondent markets? Again, the answer is independent mortgage bankers! While big banks have been involved in the wholesale and correspondent channels for years, it has been thousands upon thousands of independent mortgage bankers that have been providing consistent underwriting and funding loans for mortgage brokers. Banks have a track record of entering and exiting the market based on a host of variables. Bottom line is that banks, while valuable component of the industry, are not the consistent participants needed to experience a consistent and sustainable housing recovery. What allows independent mortgage bankers to stay consistently involved in the industry is having a healthy Fannie Mae and Freddie Mac.
Regrettably, Fannie and Freddie are anything but healthy these days. The issues facing them are complex and are the result of years of mismanagement. Yet, I am encouraged by the dialogue that I'm hearing from a number of U.S. Congressmen and their staff, not because there's a silver bullet to the problems that Fannie Mae and Freddie Mac face, but because they have come to recognize that Fannie Mae and Freddie Mac are essential to providing much-needed liquidity to the mortgage markets, and as a result, the housing markets. As we face the mid-term elections in November, I predict that we will see massive changes in the complexion of the House and Senate. It is essential that each of us in the industry become proactive in quickly educating the new freshmen elected representatives on the importance of Fannie Mae and Freddie Mac. If you want to stay on top of the issues, I welcome you to listen to my weekly radio program, Lykken on Lending, which is broadcast each Monday at noon Central Time on the Internet. You can listen by either visiting www.blogtalkradio.com/search/lykken-on-lending/ or dialing in to the program by phone at (646) 716-4972.
I predict that Fannie Mae and Freddie Mac, or a combination thereof, will return to a place of prominence in our mortgage landscape. I predict that they will not remain in conservatorship beyond the next two years, but I am leaning more towards encouraging our congressmen to keeping it a part of the federal government and avoiding the otherwise tempting alternative of privatization.
I also believe that there is a growing and overall recognition that for our nation to have a healthy housing market, it requires that we also have healthy wholesale and correspondent markets. Brokers have always been and always will be the low-cost originators. With new regulations coming into play, a lot of the things that allow the broker market to get out of hand will be somewhat constrained from happening again. In that way, we have learned from history. That said, I am not suggesting that the legislation is coming forth is ideal … far from it. But I don't know if there has ever been any legislation that has come out of the federal government that has been "spot on" at addressing the legitimate issues of whatever they're trying to manage through legislation.
Another thing that should be encouraging to many mortgage originators is that we as an industry have learned that banks and larger financial institutions find it difficult to cost-effectively expand market share. As a result, they will again find themselves returning to the wholesale/broker channel to gain the desired market share. For this reason, I remain cautiously optimistic about the return, to a modest degree, of the wholesale channel. However, I do not envision in my lifetime the wholesale channel ever regaining the market dominance that it enjoyed in the last business cycle.
The big banks, while they've enjoyed enormous market share of late, will find it difficult to effectively compete over the long haul once the markets recover. Many of the loan originators, and you may be one of them reading this article, who were formerly brokers, found it necessary to go to work for a bank. While grateful for the job, they find themselves in a suffocating culture, and I predict, will jump ship at the first opportunity to leave and set up their own mortgage brokerage operation again. What they'll find however, is that the barrier of entry has and will continue to rise. Gone are the days where anyone with a laptop and $50,000 will be able to open up a mortgage brokerage operation. Higher capital requirements are here to stay, throughout the entire mortgage “food chain.” Only those with an impeccable credit history, strong industry credentials and a reasonable net worth will be allowed to own and operate their own business.
There will be a new skill set for the successful business owner/operators of tomorrow. They will have to be much more disciplined in their business acumen and need a greater understanding of risk. New regulations and higher capital requirements are going to set the bar substantially higher in the next business cycles. Thankfully (and hopefully), our industry will only attract those who have carefully considered the pros and cons of being in the industry and will select it as a “career of choice,” rather than haphazardly and opportunistically seeing it as a get-rich-quickly “career of convenience.” Yes, future compensation will be regulated, and while there must be some inequities in this regulation, it will achieve the desired effect of keeping out those who are more short-term-minded than those more responsible and willing to put consumer interests ahead of their own financial gain. As it relates to regulation, we will, in fact, continue to witness an onslaught of new state and federal legislation as a reactive and misguided way to protect consumers. In doing so, we, as an industry, are going to experience an increase in the cost of doing business. And the penalties for not following regulation will be onerous and ugly … even criminal. The mortgage business will be a much more disciplined business moving forward and is going to require significant changes for all those who choose to remain in the industry. To quote one of my favorite books, "All those with ‘listening ears,’ hear what is being said.” And for those who recognize these trends and have prepared themselves for the opportunities that lie ahead, they will look like the lucky ones in the next business cycle. Remember the definition of “luck” is "when preparation met opportunity.”
Folks, the times, they are a-changing … and how you approach these changing times will determine your success or failure. Wholesale and correspondent lending will survive, but business is going to be done in a vastly different climate. Recognize and work with the changes and you will prosper.
Do you remember the bold proclamation I've written numerous times in past articles? I'll say it again as a way of encouragement … “I predict that more money will be made in mortgage banking in the next five years than the previous 25 years!” If you're wondering how you can be one of those who prospers in these uncertain times, call or e-mail me at [email protected]
Our firm welcomes the opportunity to talk to you about successful strategies that will ensure your prosperous future.
Now that you have read this article, I would encourage you to go back and read the article I wrote last year on the same topic for this publication. Most of what I wrote back then is as true today as it was then. I encourage you to go back to the archives of this publication and find that article. If you can't find it, e-mail me at [email protected]
, and I would be happy to send you a copy of it.
David Lykken is president, mortgage strategies and managing partner with Mortgage Banking Solutions. David has more than 35 years of industry experience and has garnered a national reputation. David has become a frequent guest on FOX Business News with Neil Cavuto, Stuart Varney, Liz Claman and Dave Asman with additional guest appearances on the CBS Evening News, Bloomberg TV and radio. He may be reached by phone at (512) 977-9900, ext. 101 or e-mail [email protected]