Nonbanks Reclaim The Throne

“Banks, it’s a tough business, right? It is cyclical, and if you’re a bank there’s a lot of other things that they do,” UWM Chief Strategy Officer Alex Elezaj said. “So I think, you know, just the cyclicality of how they manage their people — the ups and downs of it — is very difficult to do. So I think a lot of banks just say, ‘Hey, is it worth it to do this? Or should we focus on different areas of the business,’ like deposits or different types of loans that might be better suited for them.”

Some banks also have become stricter by stiffening borrowing terms and scaling back on products perceived as riskier, such as FHA loans.

“The real question for me is should we be in the FHA business at all,” said Jamie Dimon, CEO of JPMorgan Chase bank, on the second quarter earnings call in 2022. “We want to help these, but we can’t do it at great risk to JPMorgan.”

But avoiding FHA means avoiding a significant share of first-time homebuyers coming into the market this year. Many brokers have been seeing more FHA clients recently, considering these buyers were priced out of the market during the pandemic housing boom.

Dwell Mortgage CEO Shane Kidwell said he saw more “cookie-cutter loans” during the pandemic than he had ever seen in his 12 years working in the mortgage industry.

“Almost everyone could afford to get a home because rates were so low, it didn’t matter that prices were skyrocketing out of control,” Kidwell said. “Fast-forward to today, and I think for the next 12 to 24 months we’re seeing a lot more variety of people and loans that are coming into the market.”

Kidwell said he has seen many more first-time homebuyers and people coming in at a lower price point. Generally, he has seen people gravitate back toward government loans or specialty products like construction or investment-style products.

Ultimately, banks are shying away from riskier products because they rely on maintaining a bigger margin. Yet, Shah Tehrany, CEO of Madison Mortgage Services, said brokers don’t care for profits as much as banks do.

Tehrany worked as a bank loan officer for over a decade before transitioning to the broker side of the business. He said, “The journey for me was really just more around not wanting to work for these retail companies with inflated margins and be able to actually give our clients … better deals.”

“A lot of these retail organizations, their margins are just really heavily padded,” Tehrany continued. “And so it sort of precludes us from being able to really deliver some really good rates
and some really low fees.”

Retail Versus Broker

The necessity for more nontraditional loans is what also allows brokers to thrive, more so than retail loan officers. Brokers have a real advantage in a high interest rate environment where more and more borrowers cannot qualify for conventional loans. Brokers have access to a wide variety of loans through different lenders, giving them an advantage.

Retail lenders have needed to cut back on staff due to waning demand in the market, and Kidwell explains that this typically means losing support for nontraditional loan products. Again, this means losing out on first-time homebuyers and those looking for more affordable loan options.

“What most retail lenders have been doing is they’re shrinking their support teams. And so when you shrink support, the first thing they’re gonna do is take their nontraditional loan products and they’re gonna stop supporting those,” Kidwell said.

Watch it on The Interest: Brokers Take The Lead

Homebuyers are also prioritizing low interest rates in this environment, and brokers likely have more access to these lower rates just by having more options and choice. Also, competition is still tight given the low amount of inventory throughout the country, so it increases efficiency to have brokers shop around for the buyer.

“Retail lending is going to have higher interest rates because of the layers of management that are either required or just very traditional in retail lending,” Kidwell said. “So when you remove those layers, you obviously remove all that cost. And so the broker that either works for a brokerage or the broker owner has a much more competitive interest rate out of the gate.”

UWM has definitely helped the broker channel with its Game On initiative, blowing its competitors out of the water. The lender announced at the beginning of the year that it’s giving up to 125 basis points to brokers to use on any loans they lock with the lender, with a maximum of 40 basis points per loan. The company itself has benefited immensely from these aggressive price reductions, winning over 54% of the entire broker market, according to its fourth quarter earnings report.

“We’ve seen increasing market share overall in wholesale over the past couple years,” Elezaj said. “Just this year, a quarter to date, a couple thousand retail loan officers have left retail and joined wholesale. And they’re gaining more deals, and they’re winning business because of it.”

While other companies are struggling to make payroll, UWM has about 500 brokers partnering with their business per week, and thousands by month, Elezaj said. And their broker partners are raving about how UWM has contributed to their success.

“Our account executive with UWM has been incredible,” Kidwell said. “They are truly invested in brokers.”

“We love UWM,” Tehrany said. Madison Mortgage Services is ranked sixth among UWM’s top broker partners. “They’re a great company that’s focused on a lot of the same things that we’re focused on, which is speed, quality of execution, and good rates.”

The grass sure does seem greener on the wholesale side, but before retailers jump ship, they need to consider what it means to be a broker. Most importantly, it means losing their support system.

Maximilian Masters, director of sales for Timeless Mortgage, previously worked in retail before becoming a broker, and realistically illustrates the challenges that come along with that transition.

“The beauty about working the retail related side has to do with lots of support, whether it’s large marketing related teams, corporate support at an underwriting level, or a legal or compliance level,” Masters said.

The tradeoff is that brokers are allowed more freedom. They can provide their clients whatever loan product they would like from a wide variety of wholesale lenders. Masters said he was at a stage in his career where he knew enough to be “dangerous.” By that he means he knew enough about compliance and marketing to handle them himself.

“If you are a self-sufficient loan officer, meaning you self-source your business, you have a realtor base, and your purchase focused, the broker space is a wonderful, wonderful place to be right now,” Masters said.

Masters also advises retail loan officers considering switching into wholesale to not do it for the compensation rewards.

“In the retail space, it’s relatively well known that the LO is typically compensated a little bit less. … But higher comp doesn’t necessarily mean better product,” Masters said. “And it doesn’t always mean a better rate at the end of the day. … I think that both retail and the wholesale related spaces are going to yield fruit.”