“Is there benefit to it? Sure. Is there risk? Yes. Is the risk greater than in the past? It’s debatable. Is there heightened awareness of that risk? Absolutely,” says Andy Dunn, a senior attorney at Wolters Kluwer Financial Services.
The mortgage industry can blame a changing rule set for a lot of its challenges. In this case, it takes a back seat to the lingering perception that brokered loans can lead to greater exposure to secondary market loan performance problems, Dunn says.
Regulators are “agnostic” when it comes to loan channel, and although there is concern that efforts to make lenders responsible for the partners they work with extend to third party originators, TPOs are not specifically mentioned in the rules, he says.
The secondary market does consider loan broker risk in particular to be notably higher than in other channels, and investors do tend to pay less for this loan product as compared to correspondent or retail, says industry consultant Rebecca Walzak.
“The brokers that remain have done a much better job, but there are still the leftover concerns” from inordinately poor loan performance during the recent downturn, she says.
“There is an ongoing assumption of negativity” on the part of big banks when it comes to the broker channel, says Walzak.
A key hurdle for banks when it comes to working with brokers is fear that they will not have the wherewithal to repurchase loans that have gone bad, says Walzak, a specialist in operational risk management for the industry. Costs to establish appropriate control over the channel also are a concern.
There are some advantages banks that do not work with brokers are missing, Walzak believes. “You can’t ignore the whole focus on satisfying the consumer,” she says. This could be helpful to banks when trying to meet fair lending requirements, for example.
Capacity issues that have led to bank layoffs also may have been easier to handle with TPO channels, although alternatives like relatively low-cost direct lending channels and business process outsourcing have helped fill this gap somewhat, Walzak says.
Brokers have moved on to alternative partners, too, who find opportunity in the big banks’ pullback. These include community institutions who are increasingly taking on TPO-like roles themselves, and nonbanks that have fewer customer control concerns and do not retain loans.
Big banks tend to ask their originators to be refinance-focused and want to control the customer, while brokers generally prefer to focus on purchase lending and control the customer themselves, says Drew Waterhouse, managing director of Hammerhouse, a mortgage sales and operations recruiting firm.
However, smaller originators are often willing to give up some customer control in return for the kind of broader resources a big bank can deliver.
Brokers want to protect and maintain their relationships with referral partners and borrowers, “but they will say, ‘I don’t mind putting a brand on my business card,’” Waterhouse says.
The middle ground that may lead the way to some reconciliation between big banks and small TPOs is the resurgence of so-called mini-correspondent or emerging banker channels that have been making a comeback recently, says Waterhouse.
These help lower net-worth originators start down the path toward becoming correspondents and suggest some growing lender comfort with broker-sized originators who show potential.
Banks are more comfortable with third-party originators that act as correspondents, as correspondent originators have to meet certain net worth hurdles to sell closed loans, she says. However, correspondents still do less business with large banking institutions these days than they did and terms for the warehouse lines correspondents use to fund their loans remain restrictive.
Big banks and brokers are unlikely to get back together any time soon, but contingent upon the market reaching a point where it can develop a comfort level with new rules and risk, Walzak believes they could in the future.
“Once the rules settle down a little bit and the better brokers implement them, we will have to see how well loans perform,” she says.