The Rationality of the Wholesale Lending Market

JAN 11, 2013 5:05pm ET

No! Marty! We've already agreed that having information about the future can be extremely dangerous. Even if your intentions are good, it can backfire drastically!—Dr. Emmett Brown, Back to the Future

Fortunately for us forecasting the trends in the mortgage industry does not pose the same risks as knowing the future due to time travel. An educated guess about what issues will impact the home financing industry will not disrupt the space-time continuum. As we approach 2013 it is safe to say that a New Mortgage Industry (NMI) continues to emerge following the unprecedented devastation that followed the housing bubbles’ bursting in 2007-2008.

The NMI that is evolving is being shaped by both outside (regulatory and economic) forces and inside (management and technological) forces. But what is essential to understand is that the changes that are coming will negatively impact the unprepared.

With this backdrop, I believe that 2013 will see the rise of new mortgage industry fundamentals: personal relationships, efficiency, quality control and balance. Let me expand on these ideas briefly.

Personal Relationships

The investment and banking industries have a concept that underlies their fiduciary and anti-fraud, anti-money-laundering efforts known as “Know Your Customer.” At the very heart of providing both the proper advice for a client and ensuring that the financial products offered are sold to legitimate customers with good intentions, is intimate knowledge of that person.

This can also be extended to include knowledge of vendors who are involved in the delivery of services to your clients. While tools and technology can help us to know our customers and vendors, in the NMI nothing can take the place of physical proximity—living and working directly in the communities of those we serve.


The origination, processing, closing, sale and servicing of mortgage loans is far more costly in the NMI. With the all but uniform belief that the not-to-distant future of our industry includes lower overall production levels, the manner in which mortgage firms conduct their business will clearly separate those that survive from those which simply cannot make it.

If origination volumes drop by 25% when the NMI takes hold sometime over the next 12 to 18 months, our industry will likely shrink by another third. Measurements like net revenue per application, net revenue per closed loan and net revenue per employee will likely separate the winners from the losers.

Quality Control

In the NMI lenders face unprecedented risks. These risks begin at first customer contact and extend, with little exaggeration, all the way to the customer’s final mortgage payment. The fact is that any activity that places the investor owning a loan, or an insurer backing a loan at financial risk, places the lender at financial risk.  In such an environment quality controls become paramount.

Having state-of-the-art procedures for hiring employees (particularly originators), originating loans, processing loans, managing secondary-market transactions and servicing loans is vital to success and survival in the NMI. Spending on QC and what I call Total Quality Mortgage Management will accelerate in 2013.


One of the lessons from the housing bubble and the mortgage industry collapse is that balance is needed in this industry. Too much dependency on refinances, a belief that valuation is a one-way street, leniency in underwriting and failure to maintain a “trust, but verify” mentality are examples of a lack of previous balance in the industry.

The NMI will reward balance—balance in business development (self-developed referrals, web inquiries, leads), balance in production mix (refinances versus purchases), balance in growth (numbers and type of personnel, geographic footprint) and balance in financial management (organic financing versus debt financing). Firms that adopt stability and steadiness over excess and a “damn the torpedoes” mentality will prosper.

Now that I’ve laid out the general trends that I believe will impact the mortgage industry in 2013, here are some specific forecasts. I believe that three specific trends will play out in in 2013. These trends are:

  1. HARP 3.0 will come to fruition allowing millions more homeowners to benefit from refinancing and allowing the refinance-focus of the industry to continue for another year. However, as suggested above, the wisest firms will use this extra time to respond to the broader emerging trends discussed above. The reprieve from the demands of the NMI from will be temporary!
  2. Preferred vendor relationships will become the norm in the industry as lenders seek to maintain quality standards throughout the lending process. The fact is that lenders cannot expose themselves to risks caused by vendors who fail to abide by the highest standards. In response to this, many, if not most, lenders will be requiring the use of approved or preferred vendors for such things as title services.
  3. The wholesale channel will continue to reclaim market share lost in the aftermath of the mortgage meltdown and housing crash as quality origination will combine with maximized consumer choice and professional flexibility. Wholesale lending through high-integrity, experienced brokers has always provided the best option for consumers. This reality is unaffected by the advent of the NMI. In fact, due to the proximity of the customer and the intimacy of the relationship between broker and customer, and broker and wholesale mortgage company, it is reasonable to assume that wholesale lending will produce the highest quality loans in the future. As recent market share data clearly show, wholesale mortgage banking is on the ascendency. This will continue in my view until the channel reclaims a 33% to 50% share of the overall mortgage loan origination market.

2013 will continue to see significant, industry altering changes.  Individuals and firms that develop personal relationships, operate efficiently with a dedication to quality production, and seek balance in all they do will stick around for 2014. Since we have no “flux capacitor” and therefore no ability to go into the past and correct our mistakes, nor the ability to travel ahead to know the exact course to plot, my advice is to focus on the new fundamentals, and above all, use the time we have wisely.

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