Mortgage lenders are rediscovering the broker-wholesale channel as a low-cost way to extend their reach and maintain volume in the face of rising home prices and interest rates that are putting a damper on origination activity.
While the retail channel offers lenders the highest gain on sale for their originations, it's much more expensive to operate because of the costs associated with maintaining a network of physical branches and large payrolls.
Meanwhile, the wholesale channel offers lenders the second highest net return on their loans, behind only consumer-direct lending. Among large independent mortgage banks and depositories with more than $5 billion in annual volume, per-loan profits from brokered loans were nearly 25% higher than retail originations, according to Mortgage Bankers Association estimates.
The wholesale channel can also help lenders quickly establish a presence in new markets and is a key strategy for organizations looking to grow, while brokers are slowly but surely overcoming the residual stigma from the mortgage crisis.
Quote"So where you don't have brick and mortar branches, you can easily access new markets through the wholesale channel."
— Kristy Fercho, president of mortgage, Flagstar Bank
Flagstar Bank, in Troy, Mich., funds mortgages through retail, wholesale and correspondent channels. But executives there tend to think of Flagstar's wholesale channel as another "flavor" of retail.
"We think it's a great business, it's one of the more profitable channels for us. It really allows us to be able to leverage our retail platform," especially for underwriting and closing loans, said Kristy Fercho, Flagstar's president of mortgage.
Another advantage is that "it gives you access to new markets pretty quickly. So where you don't have brick and mortar branches, you can easily access new markets through the wholesale channel," she said.
Flagstar's wholesale business is nationwide. Its retail division operates in 27 states, after recently adding California, Oregon and Washington when it purchased Opes Advisors about a year ago. Flagstar only has banking branches in Michigan, though it recently agreed to acquire eight branches of Desert Community Bank in California.
That diversity helps the bank guard against geographic risk. Plus, it expands the opportunity for Community Reinvestment Act credit.
Flagstar has a targeted gain on sale margin of 60 basis points for correspondent originations, 90 basis points for wholesale loans and 300 basis points for the retail channel.
Even with fewer wholesalers purchasing loans, competition remains one of the downsides those entering the market need to consider.
"You are only as good as your last loan, so wholesalers need to make sure they have a great service experience, one that's easy to do business with," Fercho said. "Because [mortgage brokers] have other options, it puts the onus on you to be able to have a good process, to have an easy process, and to have the ability to guarantee you can close that loan."
For a bank lender, the regulatory environment it operates under — oversight by the Office of the Comptroller of the Currency if it has a federal charter — also is a factor.
Because it is the mortgage broker at the point of sale, not the bank's own loan officer, control of the process is an issue. Plus, there are fair lending concerns that nonbank wholesale lenders don't have to worry about. "For banks it could make it difficult to compete in this space as a result," Fercho said.
Homebridge Financial Services, a privately held independent mortgage banker based in Iselin, N.J., has two competing wholesale production units, Homebridge Wholesale and REMN Wholesale.
Both offer the same products, but not necessarily at the same pricing, said Homebridge Financial's CEO, Peter Norden. And account executives from both units are free to compete for the same broker's business.
"One of the reasons why I like having wholesale," he said, is that "every company I've ever had has been about diversification." That approach encompasses diversity in both geographic scope and origination channel.
"I've always believed having multichannels was good for the overall business to be able to hedge one against another," Norden added. "Just in case one slows down dramatically, the other can usually pick up the slack."
So operating two wholesale units is, "very complementary to our retail production channel. If retail should slow down in one area of the country, the wholesale side in that area of the country may in fact pick up the slack and offset any decreases in the other," Norden said.
Until the February 2017 acquisition of Prospect Mortgage, Homebridge had a 50-50 split between wholesale and retail production. The acquisition upped Homebridge's retail share to approximately 69%. Last year it did $9.3 billion or 33,604 loans in retail originations and $4.1 billion or 14,063 loans through its two wholesale channels.
But Norden is still a strong supporter of wholesale lending.
Having a wholesale business is important for companies that want to retain the servicing rights from their production and build up the annuity income from that asset. It is quicker to amass a portfolio through the wholesale channel than retail.
The business itself can generate some pretty decent profit margins and is complementary to the retail channel for companies that do both — although those profits are not at the same level as retail is from a margin perspective, Norden said.
Another advantage of wholesale is that lenders can ramp volume up or down by adjusting its pricing.
"If I need an extra $200 million a month in production and I need to push it, I can become more aggressive in price and generate that business," said Norden. "If I need less I can back off pricing because I am picking it up elsewhere."
That strategy doesn't work in retail, where in-house loan officers are dependent upon maintaining their referral relationships.
"You can't control the flow of business in retail and if you do, you're subject to losing your retail loan officers. If you start playing with your price dramatically to the point where it affects their volume, you'd be really at risk with your sales personnel on the retail side," he said.
Because of margin compression and the cost of compliance, a number of small mortgage bankers that had been in wholesale are not only exiting the channel, but have become brokers themselves, Norden said.
"So they have better expertise in the business, increasing the overall quality of the broker. The overall quality of the mortgage broker compared to 10 or 15 years ago is really night and day. It's dramatic," he said.
A shrinking mortgage banker community actually makes it a good time to get into wholesale because margins are likely to rise with fewer competitors, Norden added. "For anyone who is opportunistic, the opportunity is there to pick up market share as the industry consolidates."