Just a few weeks before the start of this year’s Mortgage Bankers Association annual convention in Atlanta, Bank of America delivered the devastating news that it would be exiting the wholesale channel. Yet, our panel of experts gathered during the show was relatively bullish on the future of the third party origination business. They believe there is a need for the mortgage broker to fill a niche in the market that the banks will not or cannot meet.
As a sign of this, during one of the presentations at the show, one speaker, David Lykken, predicted the mortgage broker industry would be the beneficiary from a shortage of loan officers as large numbers seem to be failing the new licensing tests.
The panel includes Bill Adamowski, senior vice president of corporate development at Ellie Mae; Vladimir Bien-Aime, president and chief executive of Global DMS; A.W. Pickel III, president and chief executive of LeaderOne Financial and a past president of the National Association of Mortgage Brokers; Lisa Schreiber, chief strategy officer, NetMore America; Scott Stern, chief executive, Lenders One; and Dan Thoms, executive vice president and chief strategy officer at AllRegs, along with Mark Fogarty, editorial director, and Brad Finkelstein, managing editor of Origination News.
FOGARTY: The percentage of volume originated through the wholesale channel is well below its peak. Furthermore, Bank of America has exited this channel. What do you think the long-term viability of the channel is?
SCHREIBER: At NetMore America, we do both retail and wholesale, but wholesale is primarily our business, 75%. I’ve been in wholesale since 1991, so it’s a love of mine. I think it continues to be challenged, but every time I see a challenge, we see brokers very nimble and adaptable. They seem to be able to roll with the punches to a large degree. We value our wholesale channel very much. It is the lower-cost channel for us. We have very little overhead. With all originators today, we are doing the same quality control services, so it really doesn’t matter if you are retail or wholesale. The nice part about wholesale for us, and I think for many lenders, is that you can define yourself in wholesale. You can say, “My minimum score is X.” You can say, “These are the products I value.” In retail it is much harder to do. The business we get out of wholesale is very high quality. So we’re very bullish on wholesale.
PICKEL: I don’t think wholesale goes away. That being said, I can tell you that the broker community has shrunk considerably. A number of folks have gone into what I would consider quasi-banking, trying to get either with a bank or net branch or some type of operation like that. I think the loan officer compensation piece probably hasn’t hit the entire broker world yet. I think there’s a lot of confusion about it. I don’t think the Fed feels like it’s very confused but I know for a fact—I’ve talked to people who think, “Sure I’ll get a servicing-released premium.” I don’t think they realize you can’t be paid by the consumer and the lender. The good broker, who has a different type of model that emphasized quality—we’ve talked about an insurance agent model for a broker, where really they were just the customer consultant and a third party would perform all of the verification services. If that had been taken on, I don’t think we would be where we are today. But I think that is where the industry is pushing the broker to, more and more.
FINKELSTEIN: Scott, you run a co-operative of small to midsized mortgage bankers. How are your members adjusting to the new reality?
STERN: To me the new reality starts with the legislative agenda. Our top three risk factors are the LO compensation issue, risk retention and the regulatory outcome of the [CFPB]. We’ve asked 20 to 30 smart people who have done this for a living, and none of them know how any of these issues are going to come out. I am very worried that people who don’t anything about the mortgage industry are regulating the future, especially as it relates to LO compensation. It is unprecedented for government to regulate compensation of private individuals in a private business and that is very, very troubling for us. So we are worried LOs will be driven out of business and want to go into another profession where their income is uncapped. Risk retention is deadly. The industry couldn’t survive it at all. As far as CFPB, we’re worried about an agency with untold regulatory power regulating indiscriminately. I think bankers, brokers and banks will survive this, but if we’re not diligent and we don’t make some attempt at self-regulation, it will be regulated upon us and that will be a much worse outcome.
THOMS: We looked at something else. We keep track of all of the investors out there. Three years ago we probably had 12,000 products that we were tracking. Today we have 2,100 products we are tracking. There are over 500 to 600 products in the wholesale space, so is it dead? No, there still some great variety in the products. It’s not the crazy stuff of before. What is happening is that you have overlays, you some differentiations that are helping to differentiate the products. (Talk about) the death of wholesale is premature.
STERN: There will always be people pushing the envelope. Hard money lending is going on right now. There is a need for all of us to differentiate ourselves when there are a few products.
ADAMOWSKI: There are a couple of data points that I think are interesting from my side. One is that we have seen a rise in people moving from broker to correspondent. That shows some survivability for people. I think there are some large lenders, maybe not in the upper echelon, that are differentiating themselves by going after this tranche. There are some pretty good loans coming through. Most of the wholesalers out there, a number of them are doing quite well in terms of volume and profitability. They’ve still got a lot of challenges, but the basic model of “Can I still survive in this climate?” seems to be there. As it evolves, hopefully it gets better, but with the (new) regulations, it’s tough to say.
BIEN-AIME: We’ve seen a really big decline. We’ve seen a 60% decline in the brokers that all of our clients have. It has been devastating for a lot of people. What we’ve also noticed is the net branch has become very popular. People are finding different ways, or evolving, or adapting to the entire environment. I think it will survive but I think it will decline slightly for a long period of time until we really get past all of the bad stuff. But once somebody starts really successful at wholesale, others will follow. As soon somebody is making money again everybody will jump back in. It will have to cycle through like it always does, and it will come back around.
FINKELSTEIN: How has the appraisal ordering issue affected the desire of people to remain as brokers?
BIEN-AIME: That issue, the Home Valuation Code of Conduct, a lot of that comes from the need to blame somebody for the sins of that past. Although it’s been sunset, the new rules, there are not a lot of difference. There is some validity in that because the conflict of interest helped to inflate, I wouldn’t say it wasn’t necessarily the cause, for things to get out of control really, really quickly. Although it was always in the books to have that separation, it was more of a guideline than necessarily a rule.
SCHREIBER: At this point, it is part of what we do now. We use our AMCs and have moved on. Nobody likes it still, but with all the new regulations, as soon as you get upset about one, you have a new one coming, so I can’t worry about that right now. I have to thing about my new one. Am I going to be able to make money?
BIEN-AIME: The AMC approach was probably the knee-jerk approach that a lot of people went with. With the complexity, people wanted a really quick answer and AMCs obviously are a very quick solution to the actual problem. A lot of people went that route, but they found that over time, it extends the amount of time (to originate) by having that extra layer. It increases costs as well and people have a lot of issues with that. We are seeing a big suite of lenders going the opposite way and bringing it in-house. They are able to manage it efficiently.
SCHREIBER: And they can make money doing it.
BIEN-AIME: They can turn a cost center into a profit center. I have seen a lot of people being really successful in our client base doing that.
PICKEL: We use HVCC-compliant [tech]
