Last month (see page 60 of the December 2013 issue of National Mortgage Professional Magazine), I discussed the topic of an originator going from a “Banker” to a “Broker” in 2014. I know, many are shocked by this title and topic, but I have been absolutely shocked that this topic has not discussed more over the last several years. I truly believe it has something to do with the motive and intention behind the author and invalid fear about wholesale lending overall in our industry. I have nothing to sell or gain by sharing this information, but usually that is not the case when we hear the “Broker to Banker” talk. As a successful self-originating mortgage broker and business owner myself in today’s mortgage climate, I know what I am sharing to be fact as it pertains to the current wholesale mortgage channel and what it offers consumers, originators and business owners of the brokerage.
In this edition, I wanted to focus on the “macro” view from a business owner’s perspective rather than the “micro” view from the originators perspective. There are a few interesting trends that we all need to be paying attention to. As of the date of this article near the end of 2013, the Mortgage Bankers Association (MBA) reported that profits for independent mortgage bankers and subsidiaries fell by approximately 50 percent in the third quarter of 2013. This marks the fourth consecutive quarter that production profits have decreased. The fourth quarter is also following these trends, primarily due to per-loan costs that are reaching new highs, production volume dropping, and reduced secondary marketing income. In addition, the MBA predicts a 32 percent reduction in mortgage originations in 2014 as compared to 2013.
So what does this mean? This means that there are challenges ahead for those that cannot monitor expenses, overhead, and risk. We’re going to face a mortgage market with less transactions and more competition. Creditors also have to navigate and deal with the challenges around the Qualified Mortgage (QM), in addition to planning around reduced margins and the future tapering of the Fed stimulus on mortgage rates and how this will impact affordability in the residential housing markets. The good news is that with these challenges there always hides an opportunity. The opportunities come to those with a plan and vision to position themselves around trends, putting focus on running a profitable and sustainable business.
Opportunity hides in wholesale
Most every business owner I know who is utilizing correspondent lines in the retail channel is concerned. Depending on the size of the company their level of concern vary, but most are taking notable losses and have since mid-2013. As noted, these trends in restricted production and revenue will continue for most and changes must be made as losses cannot be sustained. The original goal in establishing these lines was to increase profitability and revenue through higher margins and attempting to have more control over the process. Unfortunately, this structure also comes with higher expenses, buy-backs and other risks, capital requirements and overall costs. At the end of the day, a larger gross margin with smaller net profits is not the preferred business plan.
Not all companies are created equal and some will sustain or find a solution to build profits again and keep warehouse lines and product mix alive. Others will sell, merge, significantly reduce staff or shut down altogether. There is also another option many must consider if they have a solid operation and brand, which is to simply eliminate the risks and costs around correspondent lines and become a full brokerage. I predict that wholesale lending will grow in 2014 and the trends of separating origination and processing from the underwriting and closing will also grow. People will begin looking beyond the myths, gather the facts and begin questioning why they operate the way they do.
Change your perspective about wholesale operations
As I’ve said before, now is an excellent time to be a mortgage broker. The unfortunate part is that many originators and business owners in the retail correspondent channel have poorly and inaccurately judged the new wholesale lending channel, either comparing it to the past or just simply misinformed. Most bankers will do all that is possible to utilize their correspondent lines and only brokering as a last resort for products they don’t have, all at a high lender-paid margin so not to compete with their correspondent line margins, which can cause additional issues with compensation agreements and anti-steering requirements. This is not what brokering is about.
If you broker questionable loans inconsistently to random lenders for niche programs and higher margins, you’re going to have a bad experience. This is especially true if you are not well-versed on different guidelines, products and procedures. There will always be issues and challenges for any banker when brokering loans and this will not change. If you adjust your operations and create the same flat lender-paid margin with all the top wholesale lenders in one pricing engine for all your agency, non-agency and government loans, you will clearly see what investors are dominant on all levels. You will also be able to comply with all regulatory changes more easily providing the challenges on fair lending creditors face.
The new mortgage brokerage firm operation offers many advantages. I can personally tell you firsthand that there are excellent wholesale lenders with lightning-speed execution, market leading pricing through competition, direct agency guidelines and many that are table funding. The ability to compare is priceless without the pressure to steer toward lines, resulting in more potential for career growth. In addition, you have full control with what I believe to be the most experienced staff in the industry. Isolating underwriting and operations separate from retail origination, processing and operations does not limit control. Wholesale lenders are also our business partners looking for more business. There is an advantage having this kind of relationship and the many choices without the special interests.
The three percent points and fees cap will not impact good mortgage brokers. Simply control overhead through lower payroll requirements and be competitive on margins and fair compensation to originators. Loan-level price adjustments (LLPAs) were just significantly increased in December of 2013 making the Average Prime Offer Rate (APOR) + 150 basis points test under the qualified mortgage (QM) rule for even more interesting for creditors to calculate with conventional loans and the U.S. Department of Housing & Urban Development’s (HUD) definition which is more conservative + 115bp. I am personally concerned by these LLPA increases while rates are positioned to rise as well in 2014 and the challenges continue for affordable housing and access to credit on all levels.
It’s nearly impossible for those who have not experienced “true” wholesale operations to understand or believe any of this (or want to) in fear of losing margin or control. I can tell you, however, that it is true. I have excellent investor relationships and an advantage in my marketplace due to exclusive wholesale positioning. You don’t lose control, you don’t lose execution or turn-times, and you certainly don’t lose program and pricing options. If you have a bad experience, you have many other options to choose from. The size of your company and number of originators can vary, but you certainly have more controllable expenses at a lower risk and can focus on originations and production. At the end of the day, it’s about offering excellent programs to the consumers you serve in your marketplace while showing a sustainable profit.
At some point when the goal is to simply originate quality loans, you have to look at risk versus reward as a business owner. I believe the wholesale lending channel is the most cost-effective and profitable means to get product to market and has significant growth potential. It is also my opinion that on average the borrower receives more favorable loan terms and options with more controlled costs and higher lender rebate opportunities. These benefits help balance some of the significant challenges our industry faces in 2014 and trends that appear to continue. The transition from banker to broker is not difficult other than the likely requirement to layoff unnecessary support staff to cut overhead and set up the right broker agreements.
Andy W. Harris, CRMS is president and owner of Lake Oswego, Ore.-based Vantage Mortgage Group Inc. and 2010-2011 president of the Oregon Association of Mortgage Professionals. He may be reached by phone at (877) 496-0431, e-mail [email protected]
or visit www.vantagemortgagegroup.com.