BY BRIAN DAILY, SPECIAL TO NATIONAL MORTGAGE PROFESSIONAL
Wholesale and correspondent lending have been a part of the mortgage industry for decades. During the great recession, also known as the financial crisis, many industry experts predicted the end of wholesale and correspondent lending.
One thing about the wholesale and correspondent business, it always finds a way to not only survive, but thrive in the face of adversity or insurmountable odds. As the world structures with the 2020 crisis of COVID-19, the wholesale and correspondent platforms are seeing a surge in production levels at record production results.
Let’s take a deeper dive into why wholesale and correspondent business, also known as TPO (third party originated) loans, continue to outperform expert predictions. What are the drivers to this platform’s success and how does the platform continue to evolve?
I have spent over 38 years working in the TPO platform, in one form or another. I have surmised there are three main drivers that contribute to the TPO mortgage channel continually beating performance expectations. First, it’s the entrepreneur culture that is formed within the TPO channel. Serving their local communities better then big box store banks. Second is the competitive landscape internally within the platform, this continually drives a better experience for the borrower. Competition forces all participants to raise their level of performance in everything they do. Third but not last, is the continued innovation and initiative spirit that rest within the industry players that continually drive emerging trends driven by the competitive landscape.
Wholesale vs. Correspondent
Before we start to talk about the three drivers that influence the growth of the TPO business, let’s take a minute to understand the differences between wholesale and correspondent channels. Both channels are considered TPO (third party originated) loans. Meaning someone other than the direct lender sourced and originated a specific loan from a targeted borrower.
A TPO originator is commonly known as a mortgage broker. However, credit unions, other direct lenders, banks could be considered TPO originators if they originate a loan and then forward that specific loan to a third-party lender to underwrite, approve, fund that specific loan. In short, that is a general summary of what a third party originated transaction is.
The difference between a wholesale transaction and correspondent transaction can be summed up with the following. A wholesale transaction occurs when a third-party originator, originates a loan and sends that specific loan to a direct lender to be underwritten, closed and funded by the lender. The loan is closed in the lender’s name. Once closed, the lender immediately assumes ownership of that loan.
A correspondent transaction is a more controlled transaction by the third-party originator as they will typically originate a loan, underwrite, close, and fund that loan in the TPO’s name and then immediately sell that completed loan to the specific lender. A delegated correspondent TPO will complete all the tasks mentioned. A non-delegated TPO will complete all the tasks mentioned with the exception of underwriting the loan. The underwriting responsibility rests with the loan approving, buying lender.
Now that we have a clear understanding of what wholesale and correspondent lending is, let’s discuss the first driver: entrepreneur culture. The TPO business is typically driven by the mortgage broker community. Mortgage brokers are entrepreneurs who are crafty, innovative and knowledgeable on how to reach their core targeted borrower. Mortgage brokers work hand in hand with lenders, driving innovative methods and techniques to enhance the overall mortgage experience for their borrowers.
Most importantly, the mortgage broker understands and services their local communities with a sense of community, compassion, and care that most borrowers do not experience with other mortgage entities. This type of market-specific approach drives referral business and repeat business that is 2nd to none in our industry.
The second driver is the competitive nature of the business. Every TPO participant wants to figure out a way to separate themselves from the rest of the competition in their markets. Striving to create that unique and positive experience for their borrowers is what drives innovation for the mortgage business.
The Broker’s Needs
Lenders understand the broker’s needs. Lenders want to provide that unique path for the mortgage broker that can be utilized with and by the broker’s borrowers. This unique experience can be defined as companies who provide market representation for loan consultation. Unique products and programs that may not be offered by other lenders. Pricing positioning. The value propositions are provided and the mortgage broker client determines the needs of his borrower and matches those needs up against the value proposition of the lenders.
It’s that “choice” that the mortgage broker provides that creates a value proposition in itself versus, say, a bank. A bank has its one set of loan programs, pricing, submission model that must be a “one-size-fits-all” approach and that tactic may not be best suited for all borrowers.
The final contributing driver that directly influences the success of the TPO business is innovation. As the world advances itself utilizing technology enhancements, the mortgage industry is no exception. Some critics of the mortgage industry will proclaim technology advances for the mortgage industry are lagging behind other industries.
However, when you add in the multiple layers of complex requirements for our industry such as local, state, federal regulatory requirements, various compliance audits, aggregator, investor, GSE buyer/seller agreements that have additional protection requirements, building a technology platform for this industry is no easy task. With that said, it is being done.
The TPO channel has come a long way from days past. Digitization is transforming the mortgage industry with keen focus on measuring risk, compliance, driving efficiencies, resulting in cost controls and most importantly, understanding the customer experience. Electronic disclosures, electronic signatures, transferring key reports such as appraisals are not only done on the borrower’s computers, but can be done on smart devices with a simple app. The transferring of data is literally almost immediate.
GSE’s for example are building algorithm driven platforms that can measure a borrower’s basic credit components for qualifying and determine a borrower’s risk factors instantly, which speeds up the timelines for approvals and mitigates some of the risk on a file. TPO participants are taking full advantage of these innovative suites of products and services because the lenders are enabling them to permit that overall unique experience for their borrowers.
As states loosen up on their outdated regulatory requirements and the country becomes more consistent by accepting technology advances, our industry will continue to drive innovation at all levels for the consumer. The result will be more individuals buying homes given its less intrusive execution model. That’s a win-win for everyone.