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I get feisty when I hear that wholesale is going away!

 

Truth be told, I get feisty about a lot of things. But seriously, who are these people making that prediction?  Have they worked in Wholesale? Do they think about the mortgage industry as a business and its value propositions, are they just trying to advance their own agenda or looking for the next ‘trend’ to make a quick dollar? 

 

Today, I am what I feared I would become when I started in my business; an “old timer”. For the last 25 years I have experienced quite a few cycles as well as seen different aspects of my business get strong, weaken and then coming back bigger and better to have a positive impact. I have seen originators struggle with what was perceived as high rates (9percent 30 year fixed), which to those starting in the early 80’s is relatively low (as fixed rates at that time were 12percent and higher). In addition, I have seen GPM’s (Graduated Payment Mortgages) and how the hot product in my first full year was a 3month/1year negative amortization ARM (start rate 6.50percent). But no matter what cycle I have lived through, we always have two considerations relative to our borrowers: How can we get those who want to buy a home qualify responsibly and what product best meets their needs?  

 

How did brokers proliferate?  By providing borrowers low cost options. Brokers can and will seek the best pricing, service and products in the marketplace and offer them at a cheaper cost to any borrower out in the market.

 

In the beginning of my relationships with brokers in the early 90’s, they would beat me up for  cheaper fees and pricing so they could offer the best deal to their borrowers while still making on average 1 or 1 1/2 points. Typically brokers could undercut the brick and mortar retail channels of larger organizations and they took advantage of the disparity to help their clients. The lenders who competed against brokers realized they could acquire production at a lower cost then their own branch network. Their retail human resource, commercial space and marketing costs created more overhead than wholesale originations.   Additionally, if done right (the caveat to this statement) wholesale could offer less risk (which is certainly true today) because a lender could easily have tougher restrictions on their wholesale channel than their retail channel. 

 

So what went wrong?

 

Remember my comment, wholesalers could differentiate their risk levels by more restrictive guidelines or even limiting yield spread on riskier products - somehow we forgot the rules. In the couple of years prior to the “big fall” of so many lenders, we forgot that risk was something we could manage and that low start rates and high yield spread premiums (retail operations had the same issues but it was not disclosed the same way) were a recipe for greed and aggressive lending practices. We believed in the vision that all borrowers in America deserved, make that had a “right” to, own a home to the maximum level that their application allowed, which is simply not true. Some borrowers were not ready, or would never be ready to take on that fiscal responsibility. Even more disappointing, some of us in the business even drank our own Kool-Aid.  We thought that home prices would continue to appreciate and it was a good deal for borrowers and ourselves. Did we not remember the market crashes in Texas in the early 80’s, Northeast and California in the late 80’s? 

 

Today, we are definitely in the throes of a period of “atonement.”  But in my opinion it is a bit out of whack, as our focus is NOT on the borrower that needs us more than ever, but on shedding risk at any cost. 

 

Think HVCC (please tell me who this benefits besides the AMC’s), MI guidelines (we aren’t even using delegated UW authority because we are afraid of the MI companies pulling their insurance), HERA re-disclosures (how many times in a 30 day period do we need to send more disclosures when the first time is tough to understand) and now the new RESPA requirements (how is it possible that taking an itemization of costs and lumping them together is easier for a borrower to understand).

 

And who is to blame for all this? The mortgage broker? Wasn’t it the mortgage broker that all along had to disclose what they were making not only in the beginning of the process, but then again when the lender re-disclosed and yet again when the borrower went to closing on the HUD 1. Wasn’t it the same lenders that had big retail operations who were also pricing to attract wholesale brokers, sometimes without any barriers to entering their programs, and then UW the same loans to fill their servicing portfolios? Didn’t FNMA and FHLMC tell us that brokered loans were riskier and have higher QC requirements for themselves and us? 

 

I don’t know about other lenders, but with my management experience in the channel, including two top 10 bankers, wholesale outperformed the retail group. Today as well, the disparity of guidelines we have enacted to address risk in wholesale (mostly from the fear of our industry partners)  keeps our organization as a “great performer” with our investors (even though we are over 60percent wholesale). Our wholesale channel was always profitable, why? Lower cost to produce. Today’s pre-funding QC requirements are done on all channel originations, not just wholesale, so it doesn’t cost us more to process those loans and as stated earlier, we have much less overhead.  

 

The brokers that I have worked with over the last 17 years have always found a way to deal with increased regulation and as such, are most likely to find a way to deal with today’s new challenges. As the market stabilizes and servicers have to replace their poor performing assets with new higher quality loans, there is no way for them to get enough volume through their retail channels or their bank branches. They will have to be able to aggregate quality loans from a larger source. They will need correspondent lenders that are willing to be the ‘front man” to assess risk and have skin in the game when it comes to issues. They will need groups of originators and origination pools of loans at a specific risk profile (whether it is higher FICO scores or lower LTV’s) that cannot typically be acquired through retail or banking branches as they have to meet all the needs of their community while working under the “brand.”

 

Over the last few years our industry has experienced some hard knocks, but as with all challenging times, the opportunities are the greatest for those learning from the past and looking forward for solutions.

 

Quality brokers will continue to fulfill lenders “defined” criteria and still have other outlets to offer additional opportunity for those borrowers that need more flexibility, and lenders will thank them for their quality product.