Running Concurrent Retail, Broker, Direct Channels Successfully

It's important to create distinct value propositions for each channel, leveraging technology and specialized teams to serve the unique needs of retail customers, brokers, and direct borrowers. Beyond discussing how to do this, the panel will also address methods for minimizing channel conflict, optimizing resource allocation, and maintaining consistent messaging across all channels to maximize overall market reach and profitability.

Transcription: 
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record. 

Daniel Stephens (00:08):
All right guys. Thank you for joining. We don't have much time, so I'm going to get right into it. Talking about running concurrent channels, maybe Chad, you want to start by sharing with us how you guys think about the various channels? What's your mental map of what each channel is supposed to do for the business?

Chad Smith (00:28):
Yeah, we specialize in consumer direct and then distributed retail through Home Loans Powered by Better. We look at trying to leverage the strength of each to support each other. An example of that would be lead generation. A lot of the data that made us get into retail was founded around watching so many customers come to us, being known as a digital lender for pre-approval, and then funding somewhere else, frequently at a higher price. We do all this data service, we generate these verified pre-approvals, and then they go fund with retail. So we entered that space via Neo. Internally, we think of Neo as Uber Black and consumer direct as UberX. A second, third, or fourth-time homebuyer familiar with digital technology may come to us looking for price and not as much handholding, whereas people that really value that concierge service go through retail.

(01:41):
It's not the same thing. If you try to take retail and plug it into the fulfillment engine of Better DTC, you're going to have some cultural problems and probably some service problems. They do a really good job. So for us, we keep it separate in many things and then try to share corporate services and parts of our fulfillment engine that can add value to them, while really retaining optionality around consumer direct. Right now we're obviously very long on home equity; that's the right product for the consumer in this spot. We have a lot of leverage in home equity through the call center. Then I would say episodic events like refi rallies, we obviously strike pretty hard there.

Daniel Stephens (02:27):
When you saw consumers leaving direct for an LO somewhere else, was that the realtor saying, "Hey listen, you've got to go find an LO somewhere"?

Chad Smith (02:38):
Yeah, I think it's pretty safe to say that a lot of real estate agents might say something like, "Don't use that online lender, go use my guy." We went and found that, but I think the data is pretty clear. For every thousand pre-approvals we generated without talking to a human through our verified pre-approval process, maybe 10% would fund with direct-to-consumer. Maybe 40% would never fund—maybe they get a home equity line, maybe they wouldn't sell their house, or maybe they fell out from a qualification perspective—but about 45% of them funded with the usual local suspects, often at a higher price. It really shows the value. It's not just the service to the real estate agent; it's also the product offering. In consumer direct, traditionally you're kind of vanilla, chocolate, strawberry—FHA, VA, conforming—whereas in distributed retail or wholesale, brokers have access to a lot of product. Especially in this environment where affordability is such a challenge, having access to that product is key. Consumer direct shines in scale and sticking to a few things they're good at, whereas distributed retail can really focus on all things.

Daniel Stephens (03:52):
I want to come back to the scale point in a second. Before we do that, Jay, maybe you want to talk a little bit about the wholesale channels. Chad laid out how the two consumer channels interact, but in wholesale, how much do you worry about the correspondent channels, the broker channel, the retail channel, and the integration of those?

Jay Boand (04:12):
Our wholesale channel is your traditional direct-to-consumer retail group. The loan officers in our retail are very similar to some of the loan officers we deal with on the wholesale side. Chad had it spot on: we've got hundreds of programs available to all of these originators. If we tried to strip it out and say, "Listen, you're going to focus on just this small piece," that's not what we focus on when we go out to our originators. Now, for a call center? Yeah, a hundred percent. You're going to focus on stuff that you can automate and not need to have a person behind it. We have a lot of programs, so we have quite a big back office and fulfillment team. We treat our wholesale brokers and those originators very similarly to our own; they are our fulfillment team's client, so we do share a lot of resources between the two. We focus on the originator, although we don't have a call center. We don't have that laser focus on automating as much as we can, having people dial for dollars, taking in leads, and trying to turn them without actually talking to a person.

Daniel Stephens (05:21):
When you guys think about channel conflict, what version of that worries you the most? What gives you the most heartache in terms of conflict between the channels? Chad, do you want to start?

Chad Smith (05:33):
Channel conflict is real for us. The thing that I've learned is that when companies get into new channels or distribution methods, they often don't understand who the customer is. In Better's case, the borrower is the customer. In Neo Home Loans' case, it could be the realtor partner. For us, it's very clear that with Neo, the loan officer is our customer and they're serving the borrower. In DTC, the borrower is our borrower. I would say the type of channel conflict we have is probably more muted than some larger players because we operate under a different name with Neo. That helps. With customers that happen to be dealt with by both channels—which doesn't happen that often—it can consume all of your day when it does. In our experience, it's about what the end consumer wishes for. Are we listening to that borrower? In consumer direct, you have a little bit more control over the loan officer and you're providing marketing, whereas in retail, they are the marketing engine. Consumer direct hasn't won a channel conflict war in our shop yet, and that'll probably be the way it goes.

Daniel Stephens (07:03):
Jay, similar view? You guys have a different mix of channels.

Jay Boand (07:06):
I agree with a lot of that. What we tend to see is that obviously our retail is us—we control it, it's our loan officer. We have products that are only available to our retail team, and then a wholesale originator says, "Hey, your retail group's marketing this, we want this." Depending on who the end investor is and what we're doing with that loan, we might only be able to offer it to our retail group. Conversely, on the broker side and regarding non-delegated correspondence specifically, we're not paying for a lot of services that they do. We provide the LOS and marketing support to our retail folks, but we don't necessarily to our broker folks. Our retail team will say, "Hey, we want the same price you're giving the broker." Well, they're on the hook for their own health insurance and their own LOS. Someone's got to pay for that somewhere.

(07:56):
When you look at them, yes, they might be getting a better price, but depending on their comp plan, they could go through what you are and you still could potentially give them a better price. Do you really need to be working on the max possible margin you can? We saw that coming out of COVID. Everybody had their margins as wide as they possibly could, and it took some of our retail and our broker partners two years to say, "You know what? Maybe we don't need to be at that because rates are so high." We could potentially get someone down into the sixes as opposed to the sevens if we take a little bit less. But that is a real piece of pricing and product-related conflict that I see between our retail and our wholesale.

Daniel Stephens (08:48):
I want to come back to the scale point you guys raised. The consumer direct channels have broadly led the way on a lot of efficiency innovation. Some of that's because they're offering a much more simple product set. Are you seeing that the operating innovation—whether it's technology, self-serve capabilities, or the streamlining of those processes—is starting to enable efficiencies in the other channels as well, even with a more complex product set and a customer who wants more live time?

Chad Smith (09:28):
We just entered the retail space this year. We have taken parts of our process, whether that's workflow or leveraging our team in India for Neo, which is new for them. We're taking it in chunks. In some esoteric products like non-QM, that gets harder to do and you don't do it a lot. Even in retail, it's a hundred-billion-dollar market. Retail and brokers dominate that market, but for us, we try to focus on where we get the most scale. On conforming FHA/VA, which is the lion's share of the market, we are absolutely leveraging Tinman, Betsy, and the workflow process that we've created over the years in consumer direct at better.com for distributed retail. They're starting to see the gains. Our whole thesis is: can we compress that cost to fulfill? If we can drop that, what does that do to the branch economics? What does that do to the customer price? What does that do for the P&L owner at Neo?

Daniel Stephens (10:43):
You mean the LOs are starting to see the field is starting to see the benefits?

Chad Smith (10:46):
Yeah, I would say so.

Daniel Stephens (10:50):
In terms of cost or in terms of the reliability of the process, or both?

Chad Smith (10:56):
Reliability in the process and cost. If we can outsource even the junior tasks, which isn't always leveraged in retail. Back to the question of what has helped consumer direct scale, you haven't seen a lot of that go into retail or wholesale unless they're using it from the UWMs of the world. For us, it's about what part makes sense. Does the Neo team buy into that? How do we start small and test it? Let's go try to get this group in Utah to try this for us. Does it work? No, it doesn't. Okay, pull back. It's really around test and learn, but making them part of the process. Ultimately, if you bring the cost to originate down for retail, there's a lot of optionality created for that branch manager and loan originator, whether that's price to the consumer or a better P&L for the branch. Once they start seeing it be successful, it spreads like wildfire because they're such an entrepreneurial group.

Jay Boand (12:10):
And they have to see it, right?

Chad Smith (12:11):
There's always hesitation.

Jay Boand (12:12):
We run into the same thing with our TPO channels. Luckily for us, we have a correspondent group, which is very similar to wholesale in a sense because the client can control a lot more activity. We can use some offshore resources, use some AI, and build pieces in to give those non-delegated clients a good experience. A lot of those also broker loans, so those clients have experience. We've proven this here; let's trickle it into the broker world within our shop. We prove it in retail and then say, "Hey, we've proven this, try it out." To Chad's point, we'll typically pick a couple of branches to say, "Listen, this is what we've done. This is the cost savings per loan." It's a big savings. If we can pass that through everywhere, everybody wins.

Daniel Stephens (12:59):
I would think for the non-delegated correspondent business, the idea that you can run an effective direct or retail channel is a strength, and you're storytelling to a business partner that you can run an operation effectively. Is that true? Do they see value?

Jay Boand (13:15):
They're kind of riding the trails, understanding ultimately we're there for the originator. You're still dealing with loan officers in these cases. Obviously, their company's going to have their own compliance teams, they're going to be ordering their own appraisals, and they're going to be taking pieces off that we're not necessarily going to control, but at the end of the day, we still have to get the loan done. Regarding retail partners or real estate partners, we see them. The same real estate agent will be on retail transactions and broker transactions. The same broker could also deliver non-delegated loans as well. From our standpoint, we want to hit a home run on all three channels.

Daniel Stephens (13:52):
Because for realtors, their ability to differentiate which channel this thing went through is limited. You need to hit all of them working.

Jay Boand (14:01):
They're going to know PMG. If it's a non-delegated loan, even though it's not our company's name on that note, they know that loan is going to us. A brokered loan, they're going to know that their broker partner has submitted that loan to us. Obviously, a retail loan, they know that originator works for us. If something goes wrong, they're just going to trigger in their brain, "Don't go to that company."

Daniel Stephens (14:22):
It's interesting that brand consistency matters even in these wholesale channels where your name isn't really on the top of the page. Talk a little bit about AI. In mortgage, there's a bunch of generative AI tools emerging. Some are working pretty well; others are still figuring out how they're going to create impact. Across channels, does increasing use of AI make the channels feel more similar because those overlays work across channels? Or do those AI solutions have to be channel-specific?

Chad Smith (15:06):
In the fulfillment engine, I do think the use of AI—in our case, Betsy—whether it's calculating income, helping an originator, a processor, or an underwriter solve a problem, is pretty similar across channels. What's different is the mortgage advisor perspective. Better was kind of anti-loan officer for a long time, but the value our mortgage advisors bring to their clients and realtor partners at Neo has blown away the whole organization, including our CEO. People have this false narrative that it's just a margin play, but you actually see the value. It's a very emotional transaction. In refi land, it's a lot more transactional. Someone goes online to find the lowest rate and it doesn't require as much handholding. Betsy is now doing 127,000 to 130,000 interactions a month.

(16:13):
A lot of those are internal. We have use cases where she's on the phone with someone for 20 minutes and they have no idea they're talking to AI. With retail, they see that, and I learn something new from retail every day because it's so entrepreneurial. We have to stay disciplined on prioritization and not chase every shiny toy, but specifically on the fulfillment side, there have been very similar use cases with Betsy and ops.

Jay Boand (16:44):
We're using AI solely for fulfillment. As these loans come in, AI is putting them together. It's not necessarily to take work away from the underwriter, but underwriters make mistakes. As we get busier and they go on overtime, they might miss a large deposit because they don't review the 37th page of the two months of bank statements required. If they miss that, it's a problem coming back after the fact, or at clear-to-close when they're double-checking. We're utilizing AI to scrub these things prior to it getting to the underwriter.

Daniel Stephens (17:30):
And similarly in correspondent?

Jay Boand (17:32):
Correct. Well, that's where we're starting. It's a little bit easier there because we've got a more complete file by the time it gets submitted. We are also working with the same company for our retail team and our traditional LOs. They can upload documents and almost pre-underwrite the loan for their borrowers. As they upload it into the engine, it's going to scrub it and within a minute say, "Hey, you've got the bank statements. This is what you need. However, address X, Y, and Z, or undisclosed debt." Using it to check for those things allows our loan officers to ask these questions in advance. To the borrower, it gives them warm and fuzzies because the underwriter's already seen it and we can get it addressed. By the time your loan goes to underwriting, we're essentially clear-to-close. Borrowers just don't like providing things multiple times.

Daniel Stephens (18:35):
Yes.

Jay Boand (18:35):
I already gave you my bank statements; now I have to go in and address something that you saw on the statement. This allows loan officers to pre-scrub the file, making it easier when it gets into underwriting and setting better expectations with the borrower.

Daniel Stephens (18:49):
I want to talk a little about channel mix. We'll have time for audience questions, so if there are questions, raise your hand. If I went back to 2010, you had a ton of folks leave the broker channel entirely, and a bunch of folks dialed down correspondent when digital refi players were taking share. I don't know that anyone would have guessed we'd have the channel mix we have today—that broker and correspondent would have come back significantly, that refi shops would have moved into purchase business, and that banks would have dialed down across the board. As you think about channel mix over the next five or 10 years, do you have a theory about what that mix becomes?

Chad Smith (19:48):
I don't know that I have a strong opinion, but what we've seen in wholesale is pretty phenomenal. Pre-crisis, Wells Fargo, Countrywide, and Ameriquest probably had 35% or 40% market share. The largest lender in the country right now is at like 8%. I think the big are going to get bigger, whether that's through correspondent, wholesale, retail, or consumer direct. What's happened in wholesale and retail is really that transparent model. There's been so much transparency. I agree with what Jay said regarding the post-COVID period. There was a lot of resentment among profitable branch leaders and distributors on the margins that were put in place to slow capacity. Everyone probably felt they should participate in that.

(20:51):
The wholesale channel has given a lot of transparency to price and economics. As a result, the retail model is shifting. That's one of the main reasons we were attracted to Neo; it is uber-transparent. You're never in this "us versus them" mindset. That trend is going to continue with technology. Whether it's AI or whatever, the transparency trend will continue.

Daniel Stephens (21:30):
It sounds like you're saying that while multiple channels create conflict issues, the ability to take strengths from one channel to the other is more valuable than those conflict issues.

Jay Boand (21:49):
Yeah, I would agree with that.

Daniel Stephens (21:50):
It's like Voltron; you're piecing together multiple capabilities into one giant.

Jay Boand (21:55):
As margins condense—and margins have shrunk, people didn't make money for two years—you have to figure out ways to keep things going. If there's a refi boom next year, consumer direct could take off for someone like us. How do we use tools and take pieces that work in correspondent where we can be the most hands-off? How do those pieces make us more efficient? During COVID, a lot of people could not hire fast enough. How do we use some of these pieces to be more efficient so that way we don't get behind? If your price is so good that you have more loans than you can fulfill, adding margin is going to cause a lot of conflict.

Daniel Stephens (22:55):
So it's also creating a volatility hedge?

Chad Smith (23:00):
In our case, we have a lot of leads and customers that know better.com. During the COVID years, this company went from 500 million to 50 billion literally in a year or two. We have a lot of pilots with retail regarding leads or customers that didn't get approved or withdrew from the call center—a 640 FICO, for example. You route them quickly to a branch in the local market, and they can offer that additional product, even if it's brokered out, because you can't be all things. Or they're calling that realtor and asking, "Is this borrower still working?" We're seeing a ton of synergy because in my business, the biggest expense item is marketing cost. If I can send leads to distributed retail where the realtor wants to hear from them, or even better, they're calling a new realtor they don't have a relationship with, it creates a flywheel. That realtor normally works with a competitor, but now we have a new partner, we're recruiting that loan officer, and I'm lowering my marketing costs.

Daniel Stephens (24:18):
Will you guys keep the brands separate?

Chad Smith (24:20):
I had experience at a former company where LoanDepot acquired two brands and kept them separate until they were big enough to ensure they were getting the return on the marketing dollars. For us, it's about what works best. In the case of Neo, we've known this team for a long time. They're very good at what they do and have a lot of passion for their brand, so we won't mess with that unless they want us to. At some point, at significant scale, you have to look at whether you grow the Neo brand along with Better or leverage it in some other way.

Daniel Stephens (25:08):
Do we have any questions from the audience? We've got a few more minutes. As we're closing, will we see more consolidation of folks aggregating multiple channels, or is there a trend toward channel concentration?

Jay Boand (25:53):
Yes and no. The ones that are doing it now have time to get it in place and do it right. We saw a bunch of people jump into the wholesale space during COVID just to grab quick production. It was messy and, in some cases, ended poorly. Had they just focused on what they do well, they probably would have had more success. Coming out of COVID, now you're saddled with extra overhead in a segment of the business you have no experience in.

(26:30):
You were just doing it to grab extra business. Those people will likely have the same problems. Companies like us have been in these channels for nine or 10 years. PennyMac started with correspondent and spent three or four years building wholesale before coming to market. They've got their three silos dialed in. UWM only focuses on wholesale. There are pros and cons to both. Can you focus on just one thing and kill it, or spread resources across three channels? We share resources and let each channel focus on what they do well, which ultimately serves the originator.

Daniel Stephens (27:35):
It's pretty hard to change your channel strategy. By the time you realize you should have a different set of channels, it's almost too late. I assume this is why you guys bought a distributed channel—it's hard to build that de novo and you couldn't do it fast.

Chad Smith (27:56):
We wanted the leadership and the expertise. I see a natural growth if you're an MSR buyer. You might quietly get into correspondent to get closer to that, and from there, you get into wholesale. That often requires acquisitions to get a team in place. Some of those guys will try to build consumer direct to defend it. Plenty of people have tried to get in over the last two years when the market's tough and are now calling people like us to partner. It's all about timing. It's hard to compete with great companies that only do one channel unless you're just trying to grab episodic cash. I think MSR owners will come closer in and go from correspondent to wholesale, similar to what you've seen with PennyMac.

Daniel Stephens (29:12):
Well guys, we're almost out of time. Any closing thoughts?

Jay Boand (29:20):
Not that I can think of. This has been fun.

Chad Smith (29:23):
Thanks a lot, Dan. Appreciate this, and Heidi and the team. Great conference.

Daniel Stephens (29:28):
I'll offer one closing thought. I think it's interesting: this might be the only financial services asset class where it is not all-systems-go on the digital channel to the exclusion of everything else. This is the only consumer financial asset class where that balance across multiple channels is totally alive. That's not true in credit cards, automotive lending, or small business lending where everybody's moving toward digital. It makes this cross-channel, multi-channel business really interesting because it's kind of the only one left.

Jay Boand (30:05):
It's also the biggest purchase people make in their entire lives. With something that big, they probably want to reach out and touch someone sometimes.

Chad Smith (30:12):
I agree with that.

Daniel Stephens (30:13):
Great. Thanks, everybody.