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"A purchase market is to a broker's disadvantage because of turn times," says Rick Roque.
"A purchase market is to a broker's disadvantage because of turn times," says Rick Roque.

Will Mortgage Brokers Gain or Lose from Shift to Purchase Market?

MAR 5, 2014 12:12pm ET
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The return of a purchase-lending market might not significantly increase brokers' share of mortgage originations, even though they have historically had the best ties to real estate agents and other referral partners.

That's because the biggest drawback of their business model brokers' inability to close in their own names is most pronounced in a purchase transaction, says industry consultant Rick Roque. That lack of control means the switch to a purchase market actually works against brokers, not for them.

"A purchase market is to a broker's disadvantage because of turn times. You can't underwrite a deal in 15 days or 20 days. Their turn times are 45, 50, 55 days," says Roque, a consultant at Menlo Corp., in Springfield, Mass., where he works with mortgage bankers that purchase mortgage brokerage and mini-correspondent businesses.

"You don't have control of the process, so you can't control the service of your Realtors. So I think brokers are at a serious disadvantage," Roque adds.

Not everyone shares Roque's pessimism. Since broker market share bottomed out at around 5% a few years ago, it now stands between 12% and 14% of the overall residential mortgage loan market, estimates Al Crisanty, vice president of national wholesale production for 360 Mortgage Group. Crisanty predicts brokers are poised to reach 20% market share by the end of 2014, a threshold that he claims is the tipping point where the natural advantages of brokers become undeniable.

United Wholesale Mortgage and others are stepping up to replace giants like Wells Fargo, Chase and Bank of America. Carrington Mortgage Services' wholesale channel is promising that a loan will be ready to close within 15 business days of receiving an appraisal. That might be the rub: new rules and a shortage of qualified appraisers are lengthening the valuation process, though the appraisal issue affects all originators, not just mortgage brokers.

And while UWM, in Troy, Mich. is currently the top-ranked wholesale funder, it's not doing the large volume the top producer six years prior did. UWM did over $2 billion of originations in this channel and a nearly 9% market share in the third quarter, according to MortgageStats.com. In the first quarter of 2007, the No. 1 wholesale lender was a more familiar name: Wells Fargo, which had volume of over $59 billion and a 34% market share then.

Mortgage brokers had their market share cut because of the tighter regulations which came about in the wake of the housing crisis. While the regulatory environment is not going to change, the surviving mortgage brokers are getting used to it and figuring out how to do business with the new rules, says Rick Seehausen, CEO of mortgage fulfillment services provider LenderLive Network, in Denver.

The portion of LenderLive's business with wholesale lenders took a big hit when the broker market collapsed, and any revival in the channel will also help his company. What mortgage brokers offer consumers is choice in terms of rate and product options, and that should drive their popularity in the purchase market, Seehausen says.

More importantly, when the mortgage broker had a market share in the range of 70%, it even had a larger share of purchase mortgages, he points out, noting it was the broker that built those relationships with real estate agents.

The purchase market favors "the feet on the street, local presence, which is historically the mortgage broker," Seehausen says.

But Roque, who from 2007 through 2009 was part of the management team at Calyx Software, developers of the broker-focused Point origination software, isn't convinced.

"I do not see any indication in the data that broker market share will get anywhere near 20%," he says.

The argument that brokers' strong local relationships will win out over other considerations doesn't ring true for Roque, because brokers can't control the process and thus, can't control the relationship. Brokers can't waive conditions the way a lender doing its own underwriting can.

The broker could have a friendly relationship with a borrower's real estate agent, but if the closing is delayed because of funding issues, the agent will turn elsewhere. "The relationship will only take you so far. If you can't close the deal on time, that is name of the business," he says.

"It is a sad day. We have gotten rid of the brokerage segment, but the challenge is compliance, complexity and risk and wholesalers want to keep as close to their vest as they can from an operations standpoint," Roque adds.

Part of the problem might be defining who is a mortgage broker. One of Roque's clients in Florida straddles the line, closing in its own name all of the convention production. But he does not have the net worth required to be able to bank Federal Housing Administration-insured loans.

So the number of "pure mortgage brokers" has fallen dramatically since when the industry was doing almost three-quarters of all originations, he says.

Contraction among wholesale lenders in the past few years can also limit growth in the channel, Seehausen says. Plus, how do you define the community banks and credit unions which have the capacity to close loans in their own names, but for risk management purposes, have chosen to have the investor table fund the loan, he asks.

So is control of the transaction really a big enough issue to keep consumers away from mortgage brokers, particularly given the challenges facing other sources of funding?

One view that Roque and Seehausen do agree on is that large banks, which tend to rely more on call center set ups, also won't gain market share in the new purchase-driven environment. The depositories are "nonrelationship driven, transactionally-focused companies that were just there for refinances," Roque says, noting the Home Affordable Refinance Program reinforced this.

Others argue that community banks and credit unions could fill the role of the well-connected, local expert. But their loan officers are less skilled and less knowledgeable at navigating that environment that mortgage brokers, and at many small depositories, one compliance department (often a single employee) oversees multiple functions, not just mortgages.

These additional complexities and costs make it difficult for small financial institution originators and servicers to stay in the mortgage business. "That is contradictory to what we wanted to see happen with some of the regulatory changes. We are fueling too big to fail and not moving in the opposite direction," Seehausen points out.

The myriad constraints on brokers, banks and credit unions means the pendulum is swinging "hard and fast away from depositories" and toward independent mortgage bankers already accustomed to doing 60% to 70% purchase business, Roque says.

Independent mortgage bankers have local domain expertise and the same relationships with real estate agents that brokers do, plus they can create custom products like depositories. Although those independent mortgage bankers who have been reliant upon refinancings for the bulk of their business the past few years, they are more nimble and are best poised to take advantage of the market shift.

"Whoever controls the relationship wins. So you get a mortgage banker who can control underwriting, who can control closing and funding," because they write the guidelines, Roque says.

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