Only Risk Will Lead To Reward

Remember The Appeal

When times are tough like they are now, it’s important to remember the appeal of being a broker in the first place. Many have decided to become brokers so they could have more control over their careers. In fact, many refer to themselves as entrepreneurs, since they are 100% responsible for any success or failure that comes their way.

As a broker, you start off wearing all the hats within your business; you’re a full-time administrative assistant, processor, underwriter, marketing director, social media coordinator, researcher, compliance manager, and sales agent. You need to plan for market downturns, like a business owner would, and have enough financial resources to carry you through tough times. Above all, you have to answer to your clients. Without them, you have no business.

When the housing market began to boom in 2020, active state mortgage loan originator licenses increased 21% from the year prior. Because interest rates were near historic lows, bringing in business was easy for brokers and loan officers. Many were looking to refinance or buy a home in a more affordable market. Broker comps were high then, but they naturally began to taper off as buyer demand faded. Data from ATTOM shows that by the end of the third quarter in 2022 purchase loans fell 33% and refinances fell 67% from last year.

Don’t Be Hopeless

Feeling a bit hopeless? Well, you shouldn’t. Remember, you got in this business so you could be in charge of your own destiny. Now is the time to take control and figure out what options are out there for you.

With originations plummeting, many mortgage companies are evaluating ways to future-proof their origination engines so the next boom can be met with better systems and more control, so they can come out more profitable. For mortgage brokers who have enough volume, becoming a mortgage banker is one such direction they can pursue to take their company to the next level. If you’re considering mortgage banking as an option, there are two particular terms that you should add to your vocabulary that might help you in the long run: delegated and non-delegated.

Plenty of industry professionals struggle to define the difference between delegated and non-delegated, though they may be too embarrassed to admit it. Here, you’ll get the full breakdown of how correspondent lenders view each path, including the costs and benefits to each.

Definitions

The big difference between working with correspondent lenders on a delegated or a non-delegated basis is who’s doing the underwriting.

Non-Delegated: If the mortgage banker has a non-delegated relationship with the correspondent lenders, then the mortgage underwriter from the correspondent lender underwrites and approves the loan.

Delegated: If the mortgage banker has a delegated relationship with the correspondent lender, then the mortgage banker will need to underwrite the loan with their in-house mortgage underwriter.

Shane O’Dell, Premier Mortgage Resources director of correspondent lending, explains that the transition from non-delegated and delegated happens in a specific order. You start out as a mortgage broker, but those that want more control over their business and work flow would transition to non-delegated. Then, those who want complete control over their business would transition into delegated.

Being a broker is all about freedom and the power of options. When you become a mortgage broker, you have plenty of options working with the various wholesale lenders. As a mortgage banker, you can still participate in wholesale programs, but it’s not a product they do often. Bankers have more options working through correspondent channels.

From Broker To Non-Delegated Banker

In order to transition into non-delegated, the broker needs to get a lender license, open a warehouse line, and choose lenders who will underwrite their loans. The mortgage broker then becomes a mortgage banker.

“Some states require a separate license,” O’Dell says. “There’s a few more insurance and other requirements that are needed out there. You’d establish a warehouse line with somebody like Independent Financial and choose a lender to underwrite your loans. Then once you’ve done that for a while, you might say, ‘Hey, I want to hire my own underwriter and I want to start underwriting my own loans and sell that loan delegated.’”

Non-delegated bankers have a correspondent relationship with their lenders. The mortgage banker passes off the loan to their lender’s underwriter, who eventually issues a conditional loan approval. That loan goes back to the processor who gathers conditions by working with the loan officers and the borrowers. Then, the processor submits the conditions back to the underwriter for a clear-to-close.

The Plus Side

The beauty of becoming a mortgage banker is that the loan closes under the banker’s name, not the lender’s — even with non-delegated.

After the originating mortgage banker funds the loan through the warehouse line of credit, most bankers sell the loans to their correspondent lending partner, which is typically a larger mortgage lender. Once the lender receives funds from the sale of the loan, they pay down the warehouse line of credit and make more loans.

This may vary from lender to lender, but typically the larger correspondent lenders retain the servicing rights and package up these loans from other smaller mortgage bankers. Then these loans can be sold on the secondary market. Alternatively, a large lender like Freedom Mortgage might maintain servicing rights and not sell the loans off in order to build a servicing portfolio.

Most mortgage bankers sell off the loans they fund so their correspondent lender will pay down the warehouse line of credit, allowing the mortgage banker to originate and fund more loans.

“When you’re moving from broker to banker, it generally looks very similar to a broker transaction,” O’Dell says. “The biggest difference is you’re going to be drawing the documents, whereas a broker would not. You’ll also be funding the loan from a warehouse line. So there’s not a lot of additional work that goes into the loan. Some people would argue there’s actually more control over it and you can offer better service to the customer. I would say there definitely is because you’re in charge of your own destiny instead of relying on some lender out there to draw documents and their timeframes and then making mistakes.”

The Journey From Non-Delegated To Delegated

If the mortgage banker has a delegated relationship with the correspondent, then the banker needs to have an in-house underwriter issue the loan approval. This in-house underwriter needs to follow guidelines of the correspondent lender and underwrite the loan to their standards.

“So it really becomes a matter of it being cost effective,” Roberts said. “Because when you go from being a non-delegated to a delegated, you have to hire an underwriter.”

And underwriters aren’t cheap.

“An underwriter salary is roughly $100,000 a year,” O’Dell says. “You’ve got to look into the math and see what your underwriter can underwrite and you know, if you’re willing to take on that additional risk for the additional return on those loans.”

Having an in-house underwriter can be extremely helpful during busy times. On average, underwriting turnaround times can be seven days or more, but with a good in-house underwriter, it can be done much quicker. However, this also comes with more risk. If the in-house underwriter makes a mistake, the lender will not purchase the loan.

“The higher up the food chain you go, you’re taking on more risk,” O’Dell says.

Transitioning from non-delegated to delegated means taking on more risk. If the in-house underwriter approves too many bad loans, it can easily bankrupt a small mortgage banker. In a non-delegated scenario, if the correspondent lender’s underwriter approves a loan that goes bad, it’s the lender’s responsibility. In a delegated scenario, the responsibility falls on the mortgage banker. When loans go bad, the mortgage banker has to buy the loan back, also known as scratch and dent loans.

Higher Earning Potential?

Mortgage bankers also have higher earning potential. As you may know, mortgage brokers get paid by wholesale lenders or borrowers going lender paid or borrower paid respectively. The loans close under the wholesale lenders name and the broker compensation maximum a company can earn acting as a mortgage broker is 2.75%.

Unlike mortgage brokers, mortgage bankers do not have to disclose their fees or how much they make on each transaction because they use their own money to fund loans (their warehouse line). Thus, mortgage bankers can see substantially higher profits than they would with a broker compensation plan where the maximum is 2.75%. However, the higher the compensation, the higher the mortgage rates. As a result, mortgage bankers typically have higher rates and fees than brokers. Given the high interest rate environment we are now in, this channel may have some drawbacks.

“As opposed to a broker that’s got a fixed compensation plan, when you move to delegated, you don’t have a fixed compensation plan as the owner of the company,” O’Dell says. “When you move to a true delegated relationship, you’re taking on a lot more risk. And, of course, you should get a bigger return on that from selling the loan from fee income and everything else.”

When a broker transitions into non-delegated and then delegated, the risk is in the disclosures, O’Dell explains. Are you disclosing that correctly or is a third party disclosing that correctly for you? Are you drawing the documents correctly?

“So if there was a mistake made on the debt ratio or the appraisal wasn’t scrutinized correctly you could have a loan that’s not sellable,” O’Dell says. “The lender would choose not to buy that loan based on the underwriting errors that happened on that. And then of course you have the same risk in terms of drawing documents that are compliant and match your underwriting approval.”

If a delegated or non-delegated loan is unsellable, it gets stuck on the warehouse line. When loans get stuck, the warehouse lender works with their client to get those loans moved off the line.

“By far the majority of the loans that are stuck on the line are the delegated loans,” Roberts says. “And so you wanna make sure that there’s not any manufacturing errors and you’ve got to be prepared.”

When To Make The Leap

There are certain times when it can be opportunistic to transition into becoming a mortgage banker.

If you’re thinking of transitioning from mortgage broker to mortgage banker, the first thing to take into consideration is how many loans you’re closing, Roberts says. If a broker is a high producer, they may want to consider transitioning into a non-delegated with a correspondent lender. Typically, brokers move into non-delegated first because they can save expenses and reduce risks from outsourcing the underwriting process. Again, mortgage bankers charge higher interest rates because of fees and additional expenses, so the pricing needs to be competitive.

“Like if you’ve got a broker that’s looking to convert to a banker or a non-delegated correspondent, they’re looking for somebody that’s gonna help them and handhold them in the beginning,” O’Dell says. “So they might be a little less price sensitive and might be more interested in that personal relationship and being able to walk through loans, you know, a bigger lender out there definitely is more price driven.”

In terms of what technology a lender offers, it’s important but it does not weigh so much on the mortgage banker’s decision making, O’Dell says. Most lenders have pretty similar and pretty good technology right now. “It’s less of a factor than we used to talk about, you know, a few years back,” he added.

It’s important to note that just because you have an in-house underwriter, does not mean they need to underwrite all the loans you bring in. For example, if your underwriter is not confident or qualified to handle Non-QM loans, a Non-QM lender that offers their programs through their correspondent channel can do them for you, and those loans could be non-delegated.

“You might have a lender that you send your non-QM product to that specializes or only does Non-QM product. You might have another lender that does HELOCs and you send that loan to them. You might have another lender that just does agency loans and so you’ll send those loans to them,” O’Dell says. “Typically most of our non-delegated correspondents, I would say, do business pretty regularly with two to four investors out there like me.”

The same is true with the delegated correspondents, Roberts says. The delegated correspondents need to have multiple channels to sell that loan to because they may, in some cases, not even have a lock in place until the loan’s ready to be delivered. You need to be able to deliver it to multiple different investors and you have to underwrite it to the most stringent guidelines for all of them.

When transitioning from non-delegated to delegated, they again have to consider the costs of bringing on an in-house underwriter. According to Indeed, the national average salary is nearly $76,000.

“Are you doing enough loans and is there a big enough delta between the pricing of non-delegated and delegated for it to make sense for it to pay for itself?” Roberts says. “It can be an expense, it can be a profit center, or it could be break even. You do take additional costs on not only for the underwriting but compliance, et cetera. So that’s something you would want to sit down and do the math on before you make that transition.”

There are also certain times when the market makes it more or less favorable to go non-delegated or delegated. When origination volume is high, it’s more advantageous to go delegated. When volume is low, it’s better to go non-delegated.

“The busier it is, the higher demand for underwriting there is,” Roberts says. “It’s also harder for investors to retain the number of underwriters they need in order to handle volume. So they start stepping on the price, so to speak. They start ratcheting back the pricing of non-delegated loans, and improve the pricing for the delegated loans. This makes it more attractive to buy delegated loans. This way it doesn’t affect their underwriting capacity as much. Conversely, if you’re not dealing with a lot of volume, you would go for non-delegated.”

Roberts continued: “Right now the deltas between non delegated and delegated pricing is not very much. But back in 2020 when there was a shortage of underwriting, it was like 125 basis point difference. So it’s easier to make sense of making that transition then than it is now.”

As the MBA reported, loan origination volume is expected to drop even further in 2023, making non-delegated loans the better option. Margins have been shrinking in all channels across the industry, which happens when lenders are forced to lower mortgage rates to compete with other lenders in the market. This is due to lenders trying to grow volume through lower rates and using pricing opportunities to gain market share like UWM’s price war spawned by their “Game On” strategy.

In simple English, you can’t make as much on a loan now as you made back in 2020 or 2021. During times like this, it’s easier to stay a broker, However, you can use this downtime as an opportunity to upgrade to mortgage banking by becoming a non-delegated mortgage banker. Once volume picks up again, you will be ready to become a delegated mortgage banker.

“Make sure that you’re comfortable with whoever you’re dealing with,” O’Dell says as his last piece of advice. “Try to call them (the lender) a few times and make sure you can get them on the phone and they answer. Email them and ask them some of the deep questions. If you’re just talking to account executives, ask them something about drawing documents or ask them something about post-closing and see if they can answer that. Ask how long it takes them to get you that answer on things, because that’s what you really need. Once again, somebody that’s all encompassing and can help you when stuff goes wrong or coach you.”

Getting A Warehouse Lender

A warehouse lender looks at multiple metrics to determine whether or not someone is qualified for a warehouse line.

“Typically warehouse lines are based on net worth,” Dre Roberts, senior vice president and national sales manager at Independent Financial says. “So we will leverage the net worth to 20 times. In the case of a non-delegated and a delegated, up to 15 times their net worth. We want to make sure there’s adequate liquidity to run the business, and we want to make sure that they’re profitable.”

Other questions that warehouse lenders consider are more instinctive, Roberts says. For example, do they have experience? Have they been a correspondent before? If they haven’t been a correspondent, do they have a mortgage DNA? Do they know how to originate? What resources are they going to use? What investors are they gonna sell to?

“So as far as getting the warehouse line, it can be an obstacle,” Roberts says. “Right now there’s excess liquidity in the market and excess warehouse capacity. So I think the warehouse lenders tend to be a little bit more lenient on the items that are subjective (experience, resources, investors). However, the tangible net worth liquidity, the profitability — those things are not as subjective.”

Certain warehouse lenders are gonna understand the needs of somebody transitioning from broker to banker, Roberts says. Some are more understanding of the fact that they’re not gonna know how to order a wire, they’re not gonna know how to calculate a wire, they’re not gonna know how to reconcile their loan.