The Rise Of Mega Brokers

What is your definition of a mega brokerage?

The term mega brokerage implies a great number of loan officers, and mega brokers’ responses ranged between 400 and over 1,000 loan officers. However, the definition becomes more blurred as some scale their companies to unprecedented levels.

Joseph Shalaby, co-founder and owner of E Mortgage Capital, started off this round modestly, saying, “A mega [brokerage] is a mortgage brokerage with over 400 loan officers [and] a platform built out, similar to a retail lender, with an abundance of resources to help loan officers.” As for licensing, Shalaby added that a mega brokerage should be nationwide or nearly nationwide, while noting his firm is licensed in 43 states across the country. 

By Shalaby’s standards, there are roughly 10 mega brokerages with more than 400 loan officers that produce loans every month. That would also include E Mortgage Capital, based in Irvine, California, which has roughly 650 loan officers in total.

Loan Factory CEO Thuan Nguyen, which recently surpassed 1,000 loan officers, gave a similar answer by saying a mega brokerage must have at least 500 loan officers. That brings the mega broker party down to seven or eight companies, Nguyen estimated. But, he specified that having 300 to 400 loan officers still means it’s a big brokerage with mega potential. 

NEXA Mortgage is the current winner in this category with more than 2,000 loan officers, almost double the amount of its second place competitor, Edge Home Finance Corporation. NEXA CEO Mike Kortas classifies a mega brokerage as having 1,000 loan officers or more, but also explains how the term “mega” is relative, since the bar is constantly being raised up higher as brokerages scale larger. 

“Years ago when I had 100 loan officers, they used the term mega broker for C2 Financial when they had 650 [loan officers],” Kortas said. “Looking back on that, I would not define a mega broker as having 650 loan officers. I personally define a mega broker as having 1,000 loan officers today in this environment… I think there are four or five in this category.”

As the top brokerages in the nation grew even larger, a new slang term “super mega brokerage” has been used to reference firms topping 1,000 loan officers. As the definition of mega broker evolves, that leaves some brokerages in a gray area like Equity Smart Home Loans. At just under 400 loan officers, Equity Smart Home Loans is on the cusp of being deemed a mega broker by the standards set forth. CEO Pablo Martinez said his mega status depends on how you define the word.

“What I identify as a mega broker is a broker shop that is able to infuse other smaller broker shops into our shop,” Martinez explained. “We've grown to a capacity where we can provide a lot of tools and resources that a smaller shop is no longer able to provide just because of costs.”

Tom Ahles, broker-owner of Edge Home Finance Corporation, gave a broad range of 500 to 1,000 loan officers. Those with more than 1,000 loan officers, including Edge Home Finance, are deemed super mega brokers in his perspective. But, similar to what Martinez said, Ahles also believes the term “mega” generally refers to a brokerage that's much bigger than the typical size found throughout most of the industry. 

Do mega brokerages need to have a hybrid banker-broker business model? 

Though the mega brokers have varying perspectives on the best way to run a business, it seems nearly all can agree that having a “hybrid broker-banker model” or mini-correspondent model is beneficial to the company. But responses widely differ when asked how the hybrid or mini-correspondent model affects the wholesale community, and what does being a “true broker” mean. 

Shalaby explained that the hybrid business model gives loan officers more flexibility and control. “That's the secret as to why I was able to do so much business as a producer,” he said. “A hybrid banker-broker doesn't make what a broker makes on a deal. He makes like half of what a broker makes. But he gets the deal done faster. Someone hybrid has access to raw rates that I see as a broker, but also has the flexibility that a banker does. It's the best way to do business."

Given the advantages Shalaby explained and the fact most mega brokers have a mini-correspondent model, one might be inclined to believe that model is necessary to become a mega brokerage. However, Edge Home Finance Corporation stands out as the exception. As one of the largest broker firms in the nation, Edge proves that a company can scale to a massive size by simply brokering loans in the wholesale channel.

Ahles defines “true broker” or “broker purist” as an entity that only brokers loans and do none of the non-delegated correspondent duties. “I mean true broker as in the true sense of the word; our loan officers only broker loans,” Ahles said. “We have zero correspondent lines.”

Although Modex shows that Edge Home Finance Corp. banks about 10% of their loans, the Modex support team explained that is due to missing data. Some counties or documents do not have a "broker" field included in the Deed of Trust — where Modex collects its data — even though the transaction was brokered. Therefore, the transaction is identified as banked, a spokesperson explained.

There are mixed opinions on the mini-correspondent model among mortgage brokers, believing the model allows loan officers to pick their own compensation on transactions and potentially steer borrowers into costlier loans. Opponents of the hybrid or mini-correspondent model, often refer to the CFPB’s supervisory and enforcement guidance issued in 2014 that states, “While some brokers may be setting up such arrangements because they intend to grow into full correspondent lenders, the Bureau is concerned that other brokers may simply be attempting to evade consumer protection rules affecting broker compensation.”

However, most mega brokerages have incorporated a hybrid model in which loan officers could broker or bank loans.

“You can't steer,” Shalaby argued. “You are a mini-correspondent for the purpose of the consumer, [and] you can do deals faster. You're not going to gouge this person and make five points. As a correspondent, you don’t make two-and-a-half [basis points] like a broker, but I could make one-and-a-quarter. I can make one-and-a-half and do the deal in three days versus a broker who has to go back and forth with one consumer 50 times because he's gouging them and making two-and-a-half points. A banker makes a lot less, but moves the deal through a lot faster.” 

According to Nguyen’s standards, a mortgage broker or true broker is someone that shops around on behalf of the client and sends 50% or more of their loans to the wholesale channel.

“But if you send most of your loan to your own mini-correspondent channel, then you're not shopping around anymore. You shouldn't be calling yourself a broker anymore if you don't shop around,” Nguyen said.

Instead of turning NEXA into a hybrid broker-banker model, Kortas launched AXEN Mortgage as “sister company” to NEXA in order to keep them separate. However, Kortas explained his disappointment for the way other mega and non-mega brokers run their hybrid businesses, saying “Unfortunately, the big megas are going that route with the exception of Edge…and any other broker who's doing this is not being transparent with it.” 

Kortas said that he agrees with the model being available, but warns loan officers of the lack of transparency in how they're being compensated. He encourages all those running a hybrid broker-banker shop to share the purchase invoice and coupon on every transaction with their loan officers.

“I implore those owners and those people in charge of those companies to share that with their loan officers, [and] show them what they're really making on a deal,” Kortas said, adding that at NEXA, “we share the purchase advice and the coupon on every single transaction because we will practice true transparency.” 

Initially, Kortas said he was against incorporating a hybrid business model, but later thought it was useful to capture top-producing retail loan officers switching into the broker channel. 

“The reality is, in order to get the big branch loan officers [or] mega producers out of retail, you had to have it,” Kortas said. "They understand that model more. The only difference between non-delegated correspondent and their regular correspondent is we don't actually underwrite the loan and the lender does. But we have our own underwriters at those lenders anyway.”

Martinez also found it advantageous to have a non-delegated correspondent model as part of his broker business, saying that, “I see Equity Smart as a giant tool belt. It's our job to fill that tool belt with all kinds of different tools, hammers, screwdrivers, everything that the loan officer needs to function… And one of those tools that we put in that belt is correspondent direct lending.”

But if people believe that Equity Smart is charging a lot more due to being a correspondent, they are wrong, Martinez asserted. “In fact, there's a lot of cool things that you can do correspondent, that you cannot do on the broker side,” he said, “such as extending credit to borrowers.”  

Martinez provided an example in which a borrower and a seller find themselves in a situation where there's a broken water heater and no one wants to pay for repairs. But an Equity Smart loan officer can step in to provide credits $700 to cover the water heater repairs and keep the deal moving.

How are mega broker-owners different from regular broker-owners? 

Despite their many differences, the mega brokers all agreed that they have a differing mindset compared to typical broker-owners in that they are built more like franchises, hiring smaller broker shops and incorporating them under one brand. 

“Your mortgage company is worthless, but your brand is priceless,” Shalaby said. “We absorb a broker shop from one to 50 people. They're much better off piggybacking on an ecosystem like E Mortgage Capital.”

Shalaby essentially described the recruitment strategy and concept of a mega brokerage. Smaller broker-owners and their loan officers are likely feeling the pinch from this down market, just like the rest of the industry. But, according to Shalaby, those companies have less to lose.

“Our organization is willing to make no money for years to come to support our loan officers,” Shalaby said. 

All the mega brokers echoed the same message that their abundance of resources and favorable pricing cannot be matched by the boutique brokerage. After nearly half of producing loan officers have exited the industry, according to mortgage analytics firm Ingenius, due to unfavorable market conditions, the offer to jump ship for a mega brokerage may be tempting.

“They get better pricing, better resources, better support. Everything is better,” Nguyen said. He urges struggling broker-owners to consider joining a mega brokerage where“ they can focus more of their time on originating.” 

Likewise, Martinez said, “We surpassed a level of growth that allows us to offer a lot of things for a lot cheaper than someone in a smaller shop [is offered]. Plus, we see a lot of loan officers fleeing smaller shops because when they compare what they're getting to what we have to offer, it's almost no contest.” 

Kortas shares the same mindset, asserting that NEXA Mortgage is not a mortgage company, but a mortgage platform for loan officers. “The loan officer is the company; they are the business; they are our customer. And I don’t think you’ll find differing opinions among the other mega brokers.” 

Ahles likened mega brokerages to franchises, which oversee many businesses. Teams of loan officers across the nations representing Edge, NEXA, C2 Financial, and other mega brokers get to act as their own business while being fed better resources and pricing by the mega broker platform. But first, the mega brokers are fed by their wholesale partners. 

“Having a larger scale brokerage with thousands of loan officers, it can definitely give you more power to negotiate with lenders on various things, including EPOs [early pay off penalties],” Ahles said. “But, you also don’t need to negotiate to get favorable pricing or other deals. Lenders also need to compete for our business.”

Knowing that mega brokers bring in an immense amount of volume with their mega-sized sales teams, Ahles said wholesale lenders, namely UWM, willingly offer better deals. 

Kortas said that mega brokers are now big enough to compete with some well-known names in the retail channel, listing Movement Mortgage, Rate.com (formerly Guaranteed Rate), New American Funding, and Guild Mortgage. 

“You get a lot more sway, a lot more pull, a lot more attention, a lot better rate sheets,” Kortas said, listing the advantages mega brokers get from wholesale lenders. “You get access to beta products first. You get access to everything first.”  

But other than crushing competitors, mega brokers also hint towards the fact that having more power can bring the whole broker community greater benefits. 

Are mega brokerages a threat or a boon to the broker channel? 

“Some don't like how big we get like some of these lenders, because we demand more power than we've ever been able to in a long time,” Kortas said. “And the bigger we get, the more power we can demand, the more that we can do.”

The sudden rise of mega brokers may seem threatening to the small and mid-size brokers who would find it tough to compete. Then again, some believe they can also empower the broker community; as more brokerages grow to mega-level scale, it puts brokers on a more equal playing field with their wholesale partners and retail competitors. 

“Our lenders bend over backwards for us to make sure that they deliver within our expectations,” Shalaby said, proceeding to list a few examples. “Dedicated underwriters, EPO protections, enhanced pricing, a concierge team added, extra account executives, underwriting exceptions.”

“Of course, when you have volume, you become a force to be reckoned with,” Martinez added. “One of my jobs as a broker is to negotiate any and all third party fees. So any credit vendors, escrow title, anything, we're gonna get better deals than a smaller broker shop.”

Other than pushing wholesale lenders to deliver greater products and benefits to the broker channel, mega brokers may be able to push further action on matters that concern the broker community, such as trigger leads, credit fees, and other hot ticket items on their agenda.

Ahles, president of growth for the Association for Independent Mortgage Experts (AIME), which is partnered with advocacy group BACPAC, said the rise of mega brokerages and the efforts of the associations representing the channel will continue advocating on behalf of brokers. His duties at AIME include developing initiatives to recruit, engage and retain more brokers to join the channel and increase market share.

Though Ahles said the associations work closely with quite a few mega brokers, not all the mega brokers prioritize political progress on those issues. Some may share the same opinion as Nguyen, who said, “I don't pay attention because I think that lenders have more power to do that.” 

Others, however, believe that the broker community needs to become more aligned in order to make progress on issues like trigger leads and credit fees. 

“I think our biggest risk is that the mortgage bankers out there are aligned,” Kortas said. “In a perfect world, you would see them aligned. But I don't ever see that happening.”

Additionally, Kortas said that banker associations receive more funding compared to broker associations simply because their members have more to contribute. 

But that may change in time as more mega brokerages develop and become more powerful. Although the industry is undergoing consolidation, mega brokers are recruiting loan officers and using this time to strengthen their numbers. 

After capturing top-producing loan officers fleeing the retail channel, some have their sights set on a consolidating broker channel.
Shalaby said his goal is to triple or quadruple the number of loan officers at E Mortgage Capital. This year his projection for total volume is $4 billion, but within the next three years hopes to increase his production to $12 billion. 

Meanwhile, Kortas plans to grow NEXA to 5,000 loan officers within the next few years, allowing them to compete with even more large retail lenders. At the same time, Nguyen has nearly accomplished his goal for the year in making Loan Factory one of the largest and most powerful brokerages in the nation in under two years. Martinez, on the other hand, is still laying down a strong foundation for Equity Smart Home Loans, so once it’s grown it will be harder to dismantle. 

“Even though some of these broker shops may be bigger or medium-sized, there's still huge opportunity for us to grow," Martinez said. “Maybe we're doing something that they're not doing, or they're ignoring certain areas of their platform that may not be providing that experience that the loan officers want.”