Outlook Brightens for Third Party Originations
Loan quality at the time of origination has much to do with how it performs going forward. Many observers have pointed to problems with the quality of third-party originations as one of the causes of the mortgage meltdown.
As a result, the TPO channels, especially wholesale, have suffered in the aftermath. Yet many mortgage servicers still realize that wholesale and correspondent loan purchases remain one of the most cost effective ways to bulk up their mortgage servicing rights portfolios.
During this segment of a roundtable interview held at the Mortgage Bankers Association’s annual convention in Chicago, Mortgage Servicing News editor Mark Fogarty lead the panel in a discussion about the future of the third-party origination channels.
Participants include Jeff Taylor, co-founder and managing partner, Digital Risk; Bob Simpson, president, Imarc; Ruth Lee, executive vice president, Titan Lenders Corp.; Daniel Jacobs, president, retail branching for Residential Finance Corp.; and Garth Graham, partner, Stratmor Group.
FOGARTY: What do you see as the outlook for wholesale and correspondent lending?
LEE: I see correspondent becoming more and more popular. (Editor’s Note: During the conference, Titan announced it is entering the correspondent aggregator business.) A lot of people really like the idea that you don’t have to buy somebody’s compliance, that you are basically buying whole loans. They take on the risk, there’s definitely been higher net-worth requirements that have come about and a lot of people in the industry are figuring out this whole retained earnings thing and they’re like, “OK, we need to do that.” And you’re seeing it reflected in Fannie, Freddie and Ginnie, but you’re also seeing it reflected in the warehouse lenders, in the investors. If you want to play in the game, you actually have to really build a better business and you have to have a little bit more skin in the game. There’s going to be kind of a new crop of tier 2 correspondent investors, and you’re already seeing them come into the market. They’re becoming more popular, people like delivering to them because the service levels are better, as well as they feel that they’re most customer-service oriented.
TAYLOR: I agree the correspondent model is really starting to grow. All those midtier or regional banks are getting into the mortgage market, they’re going to go from the correspondent perspective. Wholesale still has a lot of gaps and a lot of perceived risk, so I think correspondent is going to be what we’re going to see grow in the next year or two.
JACOBS: Yet, we’ve seen the wholesale segment increase to market share over the last year, which was fairly shocking. But it’s still pretty low.
FOGARTY: Right. But it’s shocking to me that there was any increase in it. It’s been really surprising to me. The big surprise for me to see was where it bottomed out, 6%; it’s gone back up.
JACOBS: Who are these people that have decided it’s good to be a broker again and they decided to go back to doing that?
LEE: They weren’t in the market before, so it’s the new ones coming in not expecting to make…
JACOBS: So they don’t know any better?
LEE: They don’t know any better. And they’re not expecting to make what the brokers did previously. So they’re not looking for those margins.
FOGARTY: What kind of margins are they looking for, 50 basis points?
LEE: Yeah, there’s always going to be that. I mean you have the Supercuts and then you have the guy with the barber pole. I mean there’s still going to be people who put out their shingle, they’re going to have the strip mall model but the old days where a guy can go from running cell phones in the mall to making $400,000 a year, those are over. And that little broker guy who he was like, “I’m going to be a big guy,” and it’s just over. Now you actually have to be a professional. You have to put skin in the game, you have to be a businessperson first and then know how to originate second. I mean you actually have to put time and effort into that as opposed to just rely on cash flow to eventually get you over the hump.
SIMPSON: But underlying this in the industry is kind of a drive from the top, because bricks and mortar cost of origination is something that all the lenders want to avoid. And since the brokers sell to lenders, the whole industry has wrestled with this bricks and mortar issue. How can I possibly originate all these loans and not take on more fixed overhead? So all these vendors you mentioned down here are all doing the stuff that now is going to get outsourced that might have been done in-house before, but as long as there’s a drive from the top down to the bottom saying we need you, that barber pole, please open up. Please open up a shop and I’ll see if I can find a place to fund it, because that takes something off my plate. It takes something off my responsibility, which is the bricks and mortar.
GRAHAM: The other part that we’re seeing is an awful lot of movement in consumer direct. In some cases it’s the banks, those super regional banks that through the bricks and mortar make money. They like it and they get a little drunk on the earnings and then they say, “Well, how do we get more of that?” And they think back to the consumer direct opportunity, opportunity to get the loans direct and whether it’s through the web or a direct marketing type strategy. There are really two reasons for that. One, the techniques have gotten better to identify the consumers and you’re really trying to find the sum of niches, but when you’re originating. Because you can’t put a shingle out and say, anybody call because I can convert anyone. That was the old days. So now what you need to do is say, “I want to find borrowers that look like this.” And that’s a good direct strategy and whether putting up bricks and mortar and all that may not be the most effective way in some cases. In some cases you can use direct strategies to go find those people. And then the second piece is, from a compliance standpoint, if you’ve got them all centralized on a centralized system with centralized data, you begin to feel much more comfortable that you have control of the origination piece. And I think that’s probably the rub with a broker. You can go broker if you get comfortable with that and you have your systems in place and you know who your brokers are, or you can kind of go direct where you can see it, feel it, touch it and control it through one central center. And a lot of people are heading that way.
JACOBS: The consumer-direct model is really a refi business model and like politics, the purchase business is a local one. Very few consumers are open at this point to transacting a purchase loan over the Internet or over the phone, which is interesting, because they’ve become fairly comfortable doing that on a refinance transaction, but when it comes to purchases, they don’t have that appetite yet.
GRAHAM: In a lot of cases, it’s even if the customer is comfortable, and I think a lot of them are, the Realtors aren’t comfortable.
JACOBS: As the purchase market really begins to ramp up again, there is going to be less competition. There are going to be fewer options for consumers who want to transact locally, particularly ones that don’t want to deal with their bank, that want to deal with an independent mortgage banker, because there are far fewer bricks and mortar locations, as everyone has moved to that consumer-direct model.