Handicapping the Future of Wholesale Lending
As the old saying goes: it ain't over until the fat lady sings. In this case the "it" is wholesale lending in America and the fat lady is sitting in the "green room" singing her head off with Pavarotti coaching. It's safe to say that the business of table funding brokered loans is on the gas pipe.
The major firms that have exited the "A" paper wholesale niche read like a "Who's Who" of the nation's largest table funders: Washington Mutual (ranked third), Bank of America (ranked sixth) and National City Mortgage (ranked 14th.) (In case you're wondering: almost every subprime wholesale lender has died, so let's not even go there.)
The figures represent their "A" paper standings in the fourth quarter of 2007. Year in and year out, quarter-by-quarter, Countrywide Financial Corp. dominated the wholesale lending arena, blowing away the competition. Some in the industry believe that Countrywide single handedly invented loan brokering though that's not quite true.
Countrywide was definitely an early booster of brokering and for good reason: it didn't have to pay for any loans brought to them unless the mortgage actually closed. What was there not to like?
As this column went to press, the biggest unanswered question in the mortgage industry was whether Countrywide would continue wholesaling after being acquired by Bank of America in September. There has been plenty of rumor mongering about what BoA might do (most of it in our sister publications, National Mortgage News, Origination News and Broker magazine). The rumor mill says this: that BoA will shut down Countrywide's wholesale unit within three months of the deal closing.
Most mortgage professionals familiar with the issue point to BoA's decision in the fall of 2007 to close its own wholesale/broker operation as proof that the CFC shutdown is already baked into the cake. The odd thing is that BoA officials are doing nothing to dissuade anyone from believing it. You would figure that if BoA really cared about maintaining CFC's wholesale unit it would make some type of proclamation that it's committed to maintaining at least part of the business. But it has not. BoA will not say either way what its plans are.
You cannot blame loan brokers - especially those who have shoveled business Countrywide's way for years - for feeling both abandoned and worried about their future. If Countrywide bolts third-party lending, and if you add in the other three deserters, 20% of the wholesale sector will have been wiped out within nine months. Twenty-percent is a big number.
But will the entire broker community be wiped off the face of the map? Right now, it feels that way to some. The optimists in the industry believe that with all these giants heading for the exit, it will open up new opportunities for the survivors. The optimists also believe that all the "bad actors" in the brokerage community who broke the rules and were responsible for consumers taking out mortgages they could not afford have either left the industry or been canned.
Brokers have taken a lot of heat for the mortgage meltdown, some of it well deserved, but one thing cannot be forgotten: loan brokers do not exist in a vacuum. Yes, they're the salesmen (and saleswomen) peddling the loans but they do not create products and they certainly don't securitize them. It's up to the wholesaler to keep out the dirt bags. If wholesalers and Street firms bothered to conduct real due diligence on the loan brokers that were fronting for them, perhaps, the damage would not have been so bad.
Anyway, I suspect that if BoA does pull the plug on Countrywide Wholesale Lending, it may spur some of the industry's survivors to step up to the plate and sign up those "homeless" brokers. I would gather that even with this move toward "retail is safer" that enough wholesalers will remain for the simple reason that wholesale, historically, has been one of the cheapest production channels. Brokers don't get paid unless they loan funds. Then again, it costs money to maintain wholesale account executives, computer systems and office space. The survivors will have to weigh the cost/benefit ratio to see what makes sense for them. Stay tuned.
Paul Muolo is executive editor of both Mortgage Servicing News and National Mortgage News. He can be e-mailed at Paul.Muolo
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