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Dearest Broker: Be My Valentine?
When the Super Bowl was played this year, millions of viewers more attuned to the ads than the passes were treated to an exhortation from Rocket Mortgage, nee Quicken Loans: Why don’t you use a mortgage broker?
It was the latest in a series of efforts by the largest mortgage lender in the country to strengthen its wholesale channel. To beef up its Rocket Pro TPO Services, the company knew it had to show brokers it’s on their side, pushing business their way.
Austin Niemec, Rocket’s EVP of wholesale, said the company has more than doubled it’s “partner channel” over the last two years. And Niemec seems intent on making sure it’s clear that they’re sharing the love.
“Brokers are now featured on one of the most well-known mortgage websites in the country,” he said. “Whenever Americans see the Rocket Mortgage brand during an NFL game, on HGTV, or while watching eSports, it can lead them to their local mortgage professional.”
Love The Money
It’s no secret that the big players in mortgage wholesale are trying to grab more of the channel. United Wholesale Mortgage, the largest wholesale lender in the U.S., reported eye-popping record volume and profit for 2020. And now brokers, relegated to wallflower status for so many years, are suddenly the belles of the ball.
And when you’re the belle, suddenly there are a lot of suitors for your hand.
Not just the large lenders, but many smaller companies have recently launched themselves into wholesale lending – or ramped up production after years of focusing on the retail market. Most are seeing it as a means for riding out what is going to be a turbulent market in the years to come, as interest rates increase in volatility, economic basics make another roller-coaster run, and market saturation rears up.
With all that likely, the wholesale market is the place to be, since a wholesale operation scales up and down much more quickly than a retail one.
From a market share of just 7 percent of total mortgage volume in 2011, to grabbing more than 20% in 2020, brokers are standing on top of piles of money. Mortgage origination volume in 2020 is on track to be over $4 trillion, the largest in history, Stratmor Senior Partner Garth Graham wrote in his October Insights Report. “With a market expected to set records for origination volume and profitability, most lenders are riding high in 2020.”
At the same time, large independent mortgage banks are “flush with retained earnings and are seeking to grow via acquisition to compensate for expected market volume declines. It’s a robust and indisputable sellers’ market,” says Graham.
The White-Hot Market
Nationwide wholesaler Kind Lending, for example, funded $1 billion in wholesale loan volume in just six months, a feat that took
founder and CEO Glenn Stearns 15 years to accomplish after he previously founded Stearns Lending.
Leora Ruzin, senior vice president of wholesale operations at Equity Prime Mortgage, says wholesale is hot because of the “explosion of the broker movement. There is a lot of benefit to having brokers who are the boots on the streets and tapped into their communities.”
Independent brokers make it cheaper for wholesale mortgage companies to spread their money around, she says. “Having an independent mortgage broker allows us to tap in without having expenses of a retail branch. Not only is it more cost effective, it allows larger independent banks to tap into opportunities.”
John G. Stevens, chief marketing officer and chief marketing officer for SRE Mortgage Alliance, is an enthusiastic. He proclaims, “Wholesale is where it’s at. It is exciting. Wholesale is surging. It is here to stay.”
Industry legend Andrew Taylor, former head of wholesale lending at Franklin American Mortgage Co., and now executive vice president of wholesale lending at LoanSimple, says, “I think overall wholesale lending is a great position as margins taper and profits compress. Brokers have a nimble model. They are better able to adjust. We expect them to continue to grow and thrive.”
Something else appealing about the wholesale business is that it’s the brokers, not the lenders, who shoulder the capital costs associated with opening retail locations. “We can capture market share without going the retail route and the expense of brick and mortar,” says Taylor.
When The Market Cools
There’s some disagreement on the mortgage business throughout 2021. Some argue purchases will stay strong and refinancing will eventually cool once a saturation point is hit.
How much will the market change? One analyst thinks a lot. Mike Seminari is director of Stratmor’s MortgageSAT Borrower Satisfaction Program. He predicted in October that, “Projected industry loan volume for 2021 is expected to be down roughly 30% from 2020. Oddly, few lenders, and even fewer originators, seem to notice.”
“Everyone in the industry knows that at some point, volumes will fall, and/ or margins will diminish. Companies hope to add products, such as cashout refinances, bond programs, reverse mortgage divisions, and home equity related products,” says industry analyst Rob Chrisman.
He adds, “Larger lenders and banks are indeed in a better position to do this than smaller companies, which tend to offer the products, and pricing, that larger companies offer them. But smaller companies are nimbler, and the decision-making ability more rapid, which can give them an advantage should a sudden shift in the market occur.”
Andrew Taylor agrees, echoing that when the market cools, bigger isn’t necessarily going to be better. “Size doesn’t determine winners or losers,” he says. “Where size comes into play is when a lender is too big to respond to brokers’ needs and what they value.”
Ruzin says Equity’s advantage is its flexibility and diversity. “As a wholesale lender… we don’t serve just one broker. We serve hundreds. We have the flexibility to add niche products if necessary. We can tap into other resources. No matter what retail does we will always be there.”
Stevens says it is the purchase market that will flatten the curve for wholesale mortgage companies. “As long as you are focused on purchase, [that] will help shallow out the dips and prepare for the rises,” he predicts.
“The dream of purchasing a home doesn’t go away as heavily. People still purchase at 18% and they purchase at 2%,” Stevens says. “You want to be that lender that is focused on purchase. Not go out after that shiny object of refis. The real gold is the purchase.”
IPOs May Not Matter
According to research from Stratmor, since January, the mortgage industry has witnessed two of the biggest deals in its history: United Wholesale Mortgage’s $16.1 billion merger with a special acquisition company, and Intercontinental Exchange’s $11 billion acquisition of Ellie Mae. Quicken Loans’ owner Rocket Companies raised about $1.8 billion in an August initial public offering. In early October the company was valued at about $45 billion.
More recently, Stratmor says, Guild Holdings Company, an originator and servicer of residential mortgages, closed its IPO of 6,500,000 shares at a price to the public of $15 per share. The company raised roughly $100 million, creating a valuation of $1 billion.
“The M&A deals we’re seeing this year are game changers,” Statmor’s Graham says. “They are record-breaking deals that have investors outside the industry putting money into mortgage banks that are generating solid profits.”
Yet, Chrisman says, you can’t count out the private companies in this sector. In terms of “going public,” several of these companies are owned by venture capital funds or private equity groups. In effect, they are publicly held companies without the disclosure constraints. They are usually not long-term holders of assets. With these production volumes and margins, it is a great time to sell.
The wholesale channel has always been a place to quickly ramp up production, Chrisman says, in a minimum amount of time if a company is comfortable with the risks. “And some can argue that there are underserved markets such as credit unions or small community banks that have ample production but don’t want to retain the servicing,” he added.
What Rises Can Also Fall
SRE’s Stevens likes to make a nautical analogy when explaining why public companies might be playing it too safe when markets turn turbulent. “A ship is safe in the harbor but that’s not what ships were designed for. They were designed to experience the high seas. We are in the deep waters of taking care of our clients. We will have both sunny and stormy days. As long as you’ve set expectations and you’re properly managed and purchase focus, you can come out better than when you entered the storm.”
Taylor says the ongoing quarterly search for profits hurts a company. “You’ve got to maximize shareholder value. You can’t have an unprofitable quarter,” he says. “We’re not focused on being the biggest. We’ve turned business away because we want to remain competitive in terms of turn times. We don’t want to implode.
We’re going to be patient and not just chase volume,” Taylor says.
It’s also important not to get too big, Taylor adds. “It becomes a manufacturing process. The personal level disappears and the culture disappears. Brokers want a lender they can trust and ultimately that cares. Sometimes they can feel like a number.”
Setting Themselves Apart
Not surprisingly, all of the wholesalers interviewed say what sets them apart is their service to brokers. You’ll never hear otherwise in an interview. Yet each has slightly different approaches.
Taylor says there is more than enough room for everybody in the current market. “Our focus is not on chasing other wholesale lenders and trying to take their business. Instead, we look for opportunities to expand our presence in the market.
We believe our boutique approach to brokers will draw more people into wholesale,” he says.
“It’s a fairly simple business model, do what’s right for the broker. Every question and or decision comes down to this simple truth…what’s best for the broker is best for us,” Taylor adds.
Ruzin says the good wholesale companies are focusing on making brokers content so they can originate more business. “How can we cultivate lifelong relationships with brokers so they can develop multigenerational transactions?” she says. “If we put a process into place we make sure it’s not to the detriment of brokers. We want to make it easier for them to provide to borrowers.”
Chasing short-term profits ultimately hurts a company, Stevens posits. One-time specials on rates are an outdated business model.