With interest rates continuing to decline and home prices stabilizing, the mortgage industry has seen a recent surge in interest and originations. At the end of July, purchase applications for mortgages were up six percent year over year, according to the Mortgage Bankers Association (MBA)
. And this past June, purchase originations made up 69 percent of the overall market share, according to the Ellie Mae Origination Insight Report
. These data points signal good things for wholesale and correspondent lending channels for the remainder of the year. As wholesale and correspondent brokers work to expand their business, and retail originators consider making a move, expect to see growth in these markets as originators and homebuyers alike demand the flexibility and variety provided by these lending options.
Status of the market
Significant shifts in the interest rate have driven the market during the first half of 2019. According to Ellie Mae
, the average interest rate on a 30-year fixed rate mortgage was 4.4 percent this past June. That’s down from 4.52 percent in May, and down from 4.9 percent in June 2018. Some borrowers are even seeing rates below four percent. In fact, in the first week of August, the average contract interest rate for 30-year fixed mortgage on conforming loans was just 3.93 percent, its lowest point since November 2016, according to the MBA
. These decreases may be fueling a second-quarter surge in originations. According to the Federal Reserve Bank of New York’s Center for Microeconomic Data
, first-quarter 2019 originations, including refinances, were at their lowest point in four years, totaling just over $344 billion. But originations rose to $474 billion in the second quarter, marking the highest origination volume seen since third-quarter 2017.
With such market volatility, no one can say for certain what the rest of the year will bring in terms of interest rates or originations, but there are a number of positive indicators. When the increase in mortgage originations is coupled with trends showing a slow-down in the rise in housing prices, there’s even more reason for a positive outlook. In fact, the National Association of Realtors’ Housing Affordability Index
posted a year-over-year gain in second-quarter 2019, its first such increase in two years.
Although there are no easy indicators of how the wholesale market is tracking within this, there are lenders who specialize in wholesale originations that are showing significant gains and growth. And though some large banks have closed their wholesale divisions, this past first quarter a wholesale lender ranked second in overall originations, beating out such large national banks as Wells Fargo and Chase, according to Inside Mortgage Finance
. This may signal that more borrowers are seeking out the help of mortgage brokers to find the best mortgage for their financial situation.
Partner with the right lender
Originators considering a shift to wholesale and brokers that are already familiar with the market should consider expanding their business with the assistance of the right lending partners. The lender is a critical part of the mortgage process, as any wholesale originator is well aware. The level of service provided, including the number of products available, can make or break a mortgage deal. There are many things that newcomers and experienced brokers alike should seek in their potential lending partners, and some are more important than others.
In wholesale originations, service is paramount. Not only do brokers need to provide stellar servicer to their borrowers, they expect and need the same kind of service from their lending partners. One critical indicator of this is closing times.
According to Ellie Mae
, the average number of days to close on all loans this past June was 42 days. Where does your lender fall within that? Can they match it or beat it? But even more critical than quick closing times is transparency. Does your lender set and communicate realistic expectations for closing times? Does your lender communicate well overall? Keeping borrowers up to date about the status of their loan is vital to keeping a satisfied customer.
Wholesale lenders also need to keep their broker partners satisfied. With technology playing an increasing role in lending, brokers should be sure their lending partners are keeping up to date with all the changes. Look closely at their customer relationship management (CRM) system. Is it robust and current? Is it easy to use? When was it last updated? What other technological options do they offer? Can you present loan scenarios and get a quick response on whether there is a product available to fit your borrower’s needs?
In addition to service and technological considerations, brokers should look at the business side of potential lending partners. Is their wholesale business growing? Or have they made recent cutbacks? How is their business structured? That is, is wholesale their only market? If not, how much of the business is dedicated to their wholesale department? Do they also offer correspondent channels?
Brokers should consider all these factors and more as they consider partnering with wholesale lenders.
Find the products you need
The final piece in this puzzle is loan products. Brokers and correspondent lenders need partners that offer a broad spectrum of loan options, from conventional and government loans to niche offerings, like non-agency products. The broader the product offering, the greater the opportunity to meet the needs of the clients, which means more business for originators of any kind.
Finding a lender with conventional and government loan products isn’t terribly difficult; there are many of them out there, and the loans are relatively straightforward. Brokers should be wary, however. Just because a lender lists Federal Housing Administration (FHA) loans in their product offerings, it doesn’t mean they provide loans to the full capability of the FHA’s guidelines. Originators should examine potential lenders’ underwriting guidelines to see if they use the broader parameters of the government, or Fannie Mae or Freddie Mac, or if they instead place additional requirements on borrowers. Consider talking with other brokers who have worked with a particular lender to not only determine if they can provide the loan you need, but to gauge the working environment with that lender. If you have a particular scenario in mind, consider talking with someone at the lending company to see if they have a product that can meet the needs of your borrowers.
Brokers also should carefully consider the market potential of the loans offered by a lending partner. Conventional loans make up the majority of the mortgage marketplace (68 percent this past June, according to Ellie Mae
), but what do the borrowers in your market need? Do you work primarily in government loans? Do you have borrowers that fall out of conventional guidelines? Or do you want to expand your business to include these types of loans? Borrowers with challenging credit scores are often denied by many conventional lenders, despite falling within the guidelines of government programs. Consider partnering with lenders that specialize in this market or that are creating products to meet the increasing demand for non-qualified mortgages. This may be the next big opportunity, and originators who are ready to meet borrowers’ needs with these products could see significant growth in their business. But brokers should also be willing to put in the time if they’re considering adding these products to their arsenal. These are not simple loans, and they require heavy documentation to ensure responsible lending. By aligning themselves with lenders with experience with these loans, brokers will not only get the education they need, but also the resources to back it up.
With recent interest-rate changes and home-price stabilization, the outlook for mortgage originations for the remainder of the year seems positive, and wholesale and correspondent channels are poised for growth under these conditions. Whether you’re a retail originator considering a move to wholesale, a wholesale broker looking to expand, or a mortgage professional thinking of exploring the correspondent lending channel, you will need the right lending partners to ensure success in your endeavors. Be sure to consider service, products and pricing carefully before you make your move.
Ray Brosseau is president of Carrington Mortgage Services LLC. He oversees all aspects of Carrington’s lending and servicing divisions. Under his leadership, Carrington’s full-service mortgage-lending business with wholesale, retail, and centralized sales and operations has experienced unprecedented growth and operational results. Brousseau has nearly 30 years of experience in the mortgage banking and consumer-finance industry, including more than two dozen years with CitiGroup’s consumer-finance business.
This article originally ran in the September 2019 print edition of National Mortgage Professional Magazine.