I thought I would share with you some thoughts I have, regarding this mass migration that I see of mortgage brokers transitioning to mortgage banker status. Almost everyone seems to think he needs to do it. I have had my company, Broker to Banker Consulting Services Inc., for more than six years now, and, previously, I could understand the threat from Mel Martinez at the U.S. Department of Housing and Urban Development and the proposed RESPA changes. At that time, the reasons for becoming a mortgage banker made sense. Of course, only those mortgage brokers with the minimum standard of $250,000 in net worth that was audited by a certified public accountant were eligible for the crossover. At that time, the emerging mortgage banker also had to have all of the systems and personnel in place to be able to function just like the big guys. All of that has changed in the past two years. Correspondent lenders, who once had great disdain for the new wannabes, have changed the whole culture of their corporations in order to solicit and sign up the new mortgage banker. They have changed their style of doing business so much that it puts their wholesale lending divisions at great risk of extinction.
But, don't be fooled. The 10 or 20 correspondent lenders--and you know who they are--will always seek to improve their profit margins; just as soon as one of the majors changes the rules of the game for correspondent approval, you can bet the rest will do the same. The winds of change are blowing, and as interest rates rise, they will probably be blowing very hard by the middle of next year. There is no magic to this business. Profitability is the highest priority for all companies, but especially for the large mortgage bankers that receive their highest profit margins from their retail and wholesale divisions, and not from their correspondent divisions.
Most mortgage brokers who have taken the step of incorporation are usually subchapter S corporations. That means that you have a mandatory Dec. 31 fiscal year end. Audited financials need to be prepared annually to maintain a correspondent approval, which means that they are due to the warehouse lender and correspondent lender(s) no later than March 31 of the new year. If my suspicions are correct, we will soon start to see new net worth requirements, production requirements and any number of other criteria come into play as a means of either obtaining new approvals, maintaining existing approvals or sending marginal correspondents back into the wholesale division.
So, why go through this transition just to jump on the same bandwagon as everyone else? If you're still in the development stage of your company, and production is good, but not great, your staff is limited to only a few people, or you don't understand what is involved in mortgage banking, my advice is this--don't do it. Give this whole broker to banker thing a bit more time to see what develops in a rising interest rate environment. In some cases, low volume producers will be heavily courted by the wholesale lenders and will be able to obtain a level of customer service previously unavailable. Pricing may become more negotiable. Some correspondent lenders may offer the use of a small warehouse line for their products only. All of this makes for a good deal and overall would create less risk for the mortgage broker while building toward the future.
Understand that I'm not trying to put myself out of business. In six-plus years of doing this turnkey transition from mortgage broker to mortgage banker status, I have worked with too many brokers who were not ready. It requires a commitment of energy, emotion, time, money and resources. Analyze your long-term goals and understand clearly why the transition is an important part of your growth and marketing strategy. If the answers fit, then do it--but not before.
Elaine Roccio is a mortgage banking consultant with more than 20 years of mortgage industry experience and is founder of Broker to Banker Consulting Services Inc. She can be reached through her Web site, www.brokertobankerconsultingsvc.com.