National Mortgage News' Andrew Martinez speaks with Pennymac's Kim Nichols about the wholesale channel and looming industry changes.
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.
Andrew Martinez (00:11):
Hello and welcome to today's Horizon Leader session. My name is Andrew Martinez. I'm a reporter at National Mortgage News, and today I'm joined by Kim Nichols, the chief TPO Production Officer at Penny Mac. Kim, thanks for joining us today.
Kim Nichols (00:22):
Thank you so much. Appreciate you having me.
Andrew Martinez (00:24):
Yeah, thanks for being here. And today we're going to dive into the wholesale space. Really, we're going to start by talking about Penny Mac and how it's just become one of the largest players in the space, kind of the strategy behind that. We're also going to get into the broker space, really just discuss some of the opportunities, challenges, some of the big topics of interest of brokers today. So to begin, Kim was I wondering if you could start by just talking about your background, really, how you came into this role at Penny Mac?
Kim Nichols (00:50):
Well, sure, sure. My early background had its foundation in secondary marketing capital markets and that realm, which really served me well in terms of understanding the economics of the business. And from there, I rolled into the correspondent channel and ended up at Penny Mac starting in 2011 when we opened up the delegated correspondent channel for Penny Mac. And we were quickly growing that and amassing market share into that space. And ultimately we said, we need a divergent strategy. We need to be able to grow in different ways. And so once we had attained a certain share, we said, okay, what is that strategy? Should we go into distributed retail? Should we pursue the wholesale channel? And our correspondent clients, by and large just serve that distributed retail channel so well, we thought they're doing a great job with that. We're good partners with them. Let's go to our B2B route. And we decided on the wholesale channel broker, TPO, whatever you want to call it, that's where we landed. And we are number three in the space today, and we're pretty excited about our future growth plans as well.
Andrew Martinez (02:03):
Yeah, I feel like it's been just such a rapid growth. I was wondering if you could just explain how many brokers do you work with today? Maybe how much volume you guys are doing? It just seemed like so rapid in the past few years.
Kim Nichols (02:12):
Yes. Yeah, we have just over 5,000 TPO partners. Those are distinct companies that we work with. And they range in size from scaled brokerages with a couple thousand los down to a single person shop. So they come in all shapes and sizes. And we have about 30,000 loan originators within that ecosystem that are attached to those 5,000 TPO partners.
Andrew Martinez (02:40):
Got it. And we're talking like billions in volume, is that correct?
Kim Nichols (02:42):
Oh, yes. Yes, there is. And our quarterly run rate, and we're publicly traded companies, so in our earnings release it reflected that we did just north of 5 billion in Q2 in originations, and we're kind of at that run rate or a little bit higher as we were growing share in the space,
Andrew Martinez (03:02):
For sure. And then maybe just to talk about your involvement in the broker space. I saw earlier this year you were named to the Broker Action Coalition. Is that correct? Yeah. I was wondering if you could just talk about that and what that entails.
Kim Nichols (03:13):
Sure. So Broker Action Coalition exists to provide advocacy for the broker channel, for the broker community, and so that they have a voice in rulemaking and regulation over their space. And so we want to be there for our partners. We want to help shape their advocacy. We want to help amplify their voice. And this was an opportunity for us to have a seat at the table in the realm of advocacy for our TPO partners. And if you think about it, you've got, brokers don't exist without lenders, and we don't have a wholesale channel without our broker partners. And so it's a very symbiotic relationship. So to line up on voices, I think back did a great thing in inviting some of the lender partners to be on the board. And so that we can help shape perspective. Because if brokers are just advocating on their own, they might not have the full picture of, Hey, here are the challenges of being a lender in this space. So if we line up with the same voice, we'll definitely be more effective in the realm of advocacy. And they're doing some great things in the channel for the broker community.
Andrew Martinez (04:23):
Yeah, yeah, for sure. I think one of the big ones I want to get into is the trigger leads kind of action. I think back was a part of that as well, but just wanted to maybe set the stage for what I was interested in asking about the trigger leads legislation, which President Trump signed the bill, I believe it was in early September, simply put, I suppose, curbing some sales of consumer data to when a borrower's credit is pulled. I just wanted to ask if you could just describe how important was that legislation? What does that mean for the lending space?
Kim Nichols (04:53):
Right. So I mean, that was a good example of our industry having one voice aligning on position to really be effective in getting that legislation passed. So a lot of great advocacy from many fronts. But what that means is that come March of 2026, you've got servicer protection, so we'll be covered in that as a servicer loans, we retain our servicing TPO channel, and then brokers get the covered by the lender exemption, so they can still do credit monitoring for credit inquiries on their books. So we get the exemption to have that protection and engage with our past clients when the time is right. But for many, many homeowners, the experience of refinancing or buying your first home we're buying a home is going to be far less painful without all those calls and the distraction in the process. So we think it's a very good thing for the industry.
Andrew Martinez (05:57):
Yeah, I was just wondering also too, I know there's plenty of industry anecdotes, I suppose, of dozens of calls, dozens of text messages, maybe just to help put it into context, was that really the case? Was it really just borrowers being bombarded?
Kim Nichols (06:10):
I, I saw a video recording on a client's phone of, it was probably 40 phone calls within the first hour of our client pulling credit, and you just saw the ripple of the leads being sold multiple times, and then the borrowers getting these phone calls. And for astute borrowers, they know what's going on, they know that their information got sold, they would know that these became leads for various lenders. But if you're a first time home buyer, less sophisticated, you're like, what is going on here? I think it's a very good thing for the consumer as well as providing protection for the servicer and the lender or broker with that original relationship.
Andrew Martinez (06:59):
For sure. And I wanted to dive into maybe some the effects of what that bill's going to have on lenders. I think one thing I was interested in recapture rate and margins. I was wondering if you could just talk about how the trigger leads legislation, say next spring home buying season, how that could really impact that.
Kim Nichols (07:14):
Well, I think what it does is it gives the original lender or broker or servicer a much better shot at converting pull through because the borrowers don't have the distraction or the lure of 40 phone calls coming at them. And the confusion of that, I do think that was part of the intent of the legislation, is that you're giving the servicer or original lender a fair shot at the loan. So it serves to say that you would have better conversion, better pull through, and ultimately better margins.
Andrew Martinez (07:51):
For sure. And then also, I believe you said in a previous interview you discussed Penny Max, I believe it's 18 month non-solicitation servicer arrangement. I was wondering if you could just talk about that, how that came to be, how that helps your partners, and if that could potentially change in a post trigger leads world.
Kim Nichols (08:09):
Sure. Yes. So in our TPO channel, we do have 18 months of servicer non-solicitation protection. And within that timeframe, when the loans are under a non-solicit, we offer our partner signals programs so that even if our clients aren't monitoring from a credit inquiry perspective, we're going to give our clients a heads up if we think that a past client is in the market for a new mortgage. So that could be a credit inquiry, it could be a home listed alert, it could be a borrower's request for a payoff demand. And as we get into more of the realm of AI and understanding or predicting consumer behavior, we can weave in some of those tools. That's not part of it yet, but it's something that I'm sure will come at us pretty quickly in terms of when we see how quickly AI is moving forward in our industry. So I think post trigger doesn't change much post trigger bill, but at least if our clients are not buying credit monitoring for their own book, if they do the loans with Penny Mac, we keep 'em in the portfolio. We at least are doing some monitoring on their behalf and helping them with that outreach.
Andrew Martinez (09:23):
For sure. And then just wanted to ask about another issue that's probably affecting brokers, I'm sure, or of interest, is the LO comp role. This is a big topic in the industry since I believe it was passed around 2012 in June, the Consumer Financial Protection Bureau, I believe, recommended to the Office of Management and Budget to review the rule. I know some in the industry have called for alterations to the rule. Some have called for it to be rescinded altogether. Big question, but I'm wondering your thoughts on the LO comp role and what you'd like to see for the industry?
Kim Nichols (09:54):
Yeah, so we do think it's ripe for reform and we're happy to see that it's going to be examined. We expect the A NPR to be put out next spring so that we have a comment period. And we as an industry can opine on various aspects of that. We think that a full rescission would be a mistake, but we think reform is definitely in line. And I think we can align around things like allowing some kind of adjustments that may be needed for situations where a loan originator makes a mistake. This is potentially a lock window. There are various aspects that we think could be in a narrow band of things that are not tied to loan terms that would be good carve outs for the rule. I think these are the things that gray areas that everybody has struggled with. And the big thing is give us better guidance when we rewrite.
(11:00):
Let's make sure everybody fully understands the re because you have so many different interpretations out there right now, whether it's in the TPO channel or the retail channel, and then there's a lot of industry finger pointing over, well, they're doing it wrong and they're violating. And why is that? Because we need more clarity as an industry. So our hope is that we line up over certain specific aspects of LO comp, but then let's get some clear guidance on what these rules really mean and how we should interpret them. Now in the TPO space, it's very interesting around LO comp because you've got the aspect of broker company compensation, and then within that, the broker owner has to align around LO compensation. And there are two different aspects to the rule. And so right now you're just an owner's margin is synonymous with ello comp per the ello comp rules, and they don't have latitude to change corporate margins as the market moves like distributed retail has.
(12:12):
So they don't have as much flexibility around maintaining or proactively or dynamically managing owner margins at the top of the house. Now, I think on the LO level, it's pretty aligned, but the lack of flexibility they have at the top of the house to manage margins is very limited under the current realm. And the other thing that I think keeps Ella Comp in check right now is that the QM points and fees rule, but in the TPO channel, QM points and fees kind of double counts lender paid compensation because it's embedded in the pricing and as part of the QM points and fees calc. So that's part of it. And I don't know that it would be in scope for LO compensation, but it's one of these things that's hanging around out there that I think needs to be addressed and maybe some alterations.
Andrew Martinez (13:09):
Yeah, so a reason as why it shouldn't be tossed altogether, is that correct?
Kim Nichols (13:13):
Yes. Yeah. Yeah.
Andrew Martinez (13:15):
What other regulatory items are on your radar that could affect lenders and brokers at large?
Kim Nichols (13:20):
Well, we're definitely paying very close attention to GSE reform in the future of GSCs. Whatever happens with that, we want to make sure that we still see that we hold in the safety soundness and integrity as they play such a crucial role in US housing finance. So that's definitely something we're paying very close attention to.
Andrew Martinez (13:43):
And is it one of those cases where it's just like all the industry wants right now is just clarity? Would that just be
Kim Nichols (13:48):
Well, yeah, I think that's might be a long ways off right now, but we're working through it. And again, it's just making sure we all stay attuned to it, have our voices be heard, and make sure that it's understood the impact that changes can make on the consumer on the smooth operation of mortgage finance in this country.
Andrew Martinez (14:11):
Definitely. And wanted to talk about some of the products that Penny Mac has coming up, I believe in late September. Penny Mac has some, I believe it's non QM products that are going to be rolling out. I was wondering if you could just talk about those and why Penny Mac is coming out with those at this time.
Kim Nichols (14:25):
Yeah, so non QM has been a growing segment of the industry. We think that in 2025 operating at a run rate of a hundred billion in non QM production across the industry. So we wanted to participate. We've been building out our non-agency distribution platform. And so with our capital markets capability, our sizable platform around delegated correspondent production, and then we'll be further introducing it into TPO in Q4, we have great ability to succeed in non QM and distribute that to our customers and provide additional scale and liquidity into that segment of the market to our customers.
Andrew Martinez (15:09):
And then within that, has there been one product that has been more popular than others or I'm curious what you're getting the phone calls about.
Kim Nichols (15:16):
So DSCR has been asked for, it's almost every day I'm hearing, Hey Kim, do you have DSCR? I've got a couple of loans for you. I'm familiar with your system and how you guys operate. I'd love to send 'em to you. So DSCR to support property investors and then bank statement asset depletion loans, non warrantable condos, and we'll have various levels of credit grades within those aspects. So it's a broad offering, but we are participating in sort of the upper end of the credit spectrum
Andrew Martinez (15:52):
For sure. And then maybe just your earlier point too, do you foresee that just being a bigger part of the mortgage space moving forward, non qm?
Kim Nichols (16:00):
We think it is. I mean, the gig economy is here to stay, and if you look across the workforce, those numbers are climbing in terms of gig economy type jobs. I mean how people are employed and how people earn money for their families. And so you've got credit worthy borrowers who don't meet that traditional profile of the agencies that deserve to have loans, and the non QM market serves very well to support that.
Andrew Martinez (16:27):
So just want to ask why is it a good time to be a broker in today's market?
Kim Nichols (16:31):
Yeah, so I think we're at a place in the market where the market is, okay. It's not super robust, but we all do anticipate that the market's going to grow. So an entrepreneur, broker owner who puts the framework in today to set up their brokerage is really going to reap the rewards as the market grows. The other aspect of being a broker today is that you can take full advantage of the full scale and capability of someone like a PennyMac TPO, where you're operating off of technology that we built and you're operating at pricing this very competitive off of the scale that we have, and we're bringing to bear all these tools to the individual mortgage broker that they couldn't possibly build on their own. And we're doing that because technology is enabling it. So you get this full tech enabled platform, competitive pricing, and still you have the power of choice. We think that's very powerful and a great reason to be in the TPO channel today.
Andrew Martinez (17:38):
Yeah, yeah. That's good stuff. Well, thank you, Kim, for joining me today. I appreciate you coming on and hope to have you on again. And thanks for your time.
Kim Nichols (17:46):
Thank you very much, Andrew. Appreciate it.
Andrew Martinez (17:47):
And thanks everyone for tuning in.
