Jan 29th 2009 05:33 pm I Can’t Get It For You Wholesale
Big banks used to do a thriving wholesale mortgage business. Working through mortgage brokers they’d issue mortgages direct to millions of homeowners with the broker taking the marketing risk but getting points and risk-yield premiums as his or her upside. Like an insurance agent the broker was acting purely as a reseller for the bank. Well it doesn’t work that way anymore. NONE of the big banks are still doing such wholesale operations, though you can still find smaller banks and regional lenders in the field.
Wholesale mortgages like this are a heck of a business for banks, making them more profit, on average, than selling the same mortgage through a local bank branch. This is simply because of overhead and marketing expenses. Banks pay none of that for brokers yet all of it for their own salespeople.
Why, then, have the big banks abandoned the wholesale business? That’s a good question. They imply it’s because the want to reduce risk but that’s not true. Wells Fargo, for example, is the last major banks to drop their wholesale product. But while Wells dropped wholesale, they are still running their correspondent mortgage operation, which makes little sense at all if the goal was to reduce risk by dropping the brokers.
Correspondent lenders are companies that have their own lines of credit. They wholesale to the big banks in the sense that they hand over bundles of a dozen or so loans at a time to outfits like Wells, but the initial funding is done from that line of credit, making the correspondent a mortgage banker, not a mortgage broker. A key difference from the perspective of the big bank is that the correspondent lender actually underwrites the loan. Any contingent terms are set by the correspondent, not the big bank, and in fact the big bank never even sees a credit report on the borrower.
Shouldn’t that mean the risk is higher for this type of operation?
Of course it does, which means that using risk aversion as an excuse for dropping traditional wholesale lending is a lie.
The real reason Wells and the others dropped wholesale is because they can. Mortgage brokers don’t require severance payments and don’t have COBRA health insurance. Banks don’t care about brokers and can kill them with abandon knowing that they can reestablish the business overnight if conditions change.
And that’s exactly what they’ll do, which makes this abandonment of the wholesale channel more or less meaningless. Unless of course you are a mortgage broker.
Tags: banks, loans, mortgage brokers, mortgage wholesalersPosted by APIyuIRrClENtBtCk / Mortgage Lore
Mark Hewis on 30 Jan 2009 at 6:49 pm #
A mortgage is a huge loan. It is offered at a low interest rate because in the event of a problem with repaying that loan the asset that it is attached to will be owned by the loaner who can then sell it to recover the capital.
In the UK there is the concept of a ‘building society’. In its purest form these fund mortgages out of the savings and deposits they hold. That means that they make money between the difference between the rate they pay savers and the rate they charge mortgage holders. It is a nice straightforward closed loop. Also until about 1985 they were often quite provincial with the savers and loaners living and working within the same area.
These had the huge benefit that the society needed to balance the books annually and manage debt risk purely in terms of benefit to savers. It had the huge drawback that the overall debt available was limited to the regional volume of savers.
When these societies in UK converted to being banks they sent out large share issues to ’shareholders’ ( which were debtors or savers with that society ). Then they had the freedom of detaching the need to match local savings to loans. An extreme example is ‘Northern Rock’ in UK. They suddenly had the option of using national, European and International money to fund mortgages and loans.
At one point the Northern Rock ‘exposure’ was 60% - i.e. the volume of mortgages it had was met 60% by external parties to the company and only 40% by savings and deposits.
So back to square one - a wholesale model appears to be totally broken. The level of ‘real’ mortgage debt left to sell will be subject solely to that available within the local environment via personal and national savings.
There is really no one left to blame for this. Luckily the dollar as the default global currency will mean that there will be capital inflow’s ( in UK situation much worse ) but the chances are they will focus on the huge gaping hole which is government deficit.
Investing in a bunch of bricks will not be a priority.
So forget wholesale, forget Fannie Mae. Is your neighbourhood productive enough to lend you the mortgage you need?
fiddlepaddle on 06 Feb 2009 at 5:27 pm #
You are right. Brokers are basically just like contractors in the software world. When finances dictate, they are hired and fired more easily than employees. Once some bank has enough assets again, they will start lending through brokers again. The definition of “enough”, though, is still under refinement.
Rocky Dotson on 09 Feb 2009 at 5:22 pm #
I have to disagree with the premise of your article. Correspondent Lenders have never been considered more risky to purchase from then Brokers. (Yes, Brokers don’t ever own the loan, but you get the point.) While it’s true, some Correspondents do handle all of their own underwriting, banks don’t line up to give you money to fund loans just because they can. You have to have a solid company with audited financials, Errors & Omissions and Fidelity Bonds, and verifiably experienced personnel and management. The Warehouse Banks typically re-underwrite every loan they fund with a new lender until they’re very comfortable with the quality of each file, meaning that any correspondent that can underwrite their own loans has demonstrated that they are fully capable. Many Correspondents were what we termed “Super Brokers,” meaning that while they did fund the loan, the end lender handled all underwriting and usually the closing packages. The only difference with that and brokering is that the Correspondent’s funds are used at the closing table and the loan was closed in their name. Also, all Correspondents have to sign Rep and Warrant agreements with the lender/conduit, promising to buy back the loan in the event of fraud or negligence. Unlike brokers, these lenders have to prove that they have the combination of money and bonds to back up the repurchase agreements.
If you look at the difference between what it takes to be a lender vs. a broker, you’ll see why lenders are considered less risky. They actually have something to lose. I’ve worked with both types of organizations, and I’ve purchased loans from both, and I can tell you first hand why you cut off brokers first when you’re risk-averse. By the way, lenders typically make more money on wholesale business than correspondent. When you factor-in bulk packages (purchasing several loans at once as you mentioned) the spread gets even tighter. You have to pay for someone to sell you a closed loan.
The problems in the mortgage industry really originated at the top and worked their way down. Low interest rates are great for borrowers, but lousy for investors. Keep in mind that Wall Street packaged these loans (as Mortgage Backed Securities) together to create vehicles for individuals and institutions to invest in. With mortgages in the 5% range, they needed a way to provide a higher yield to their customers. In the mortgage world, yield (effectively the Interest Rate) is equivalent to risk. Nobody gets a 10% mortgage for the fun of it. They get it because they can’t get 9%. So if the dealer wanted to provide a 10% yield for their customers, they had to originate loans for people who couldn’t qualify for a 9% loan. When the business was booming, up until 2005-2006, house prices were skyrocketing. When a loan forecloses, the lender (or whoever is holding onto the paper) ends up with the house. If the house is worth 20% more that what was paid for it, even a foreclosure can be profitable. So if that’s your downside… This translated into riskier loan programs and a blind-eye turned to blatant negligence and fraud. This is what happens when you have marketing people in charge of quality control and risk analysis.
I could go into a lot more detail, but hopefully you get the picture. By the way, most of what I referenced above isn’t in existence anymore. For what it’s worth, my company now makes its money documenting exactly how negligent these lenders were by reviewing foreclosures and going after the companies that screwed up. Even for someone who’s been in the business for 15 years, it’s shocking just how ridiculous it got.
Rocky Dotson on 09 Feb 2009 at 5:34 pm #
One note about my comment above: I was speaking in generalities. There were plenty of cases of companies that shouldn’t have been given a warehouse line, shouldn’t have been allowed to underwrite their own loans, etc. In general, what I said was true, though. In my day job, I look at foreclosed loans all day. Probably 90% were originated through wholesale channels by brokers. I’m not strictly blaming them for this debacle. Brokers are practically built to push the limits. Their ability to get a loan done was the reason they originated more than half of the loans in the country. The lenders wanted the loan volume so badly that they never stopped to look at the loans to figure out if they made sense.
Bill McGonigle on 15 Feb 2009 at 6:39 pm #
Historically-low interest rates can’t be helping matters either. The further you get away from service and the closer to actually making money on the interest rate, the more disincentive there should be.
GA on 01 Mar 2009 at 4:28 pm #
Agree entirely with Rocky, at least part of the premise of your piece is wrong. Correspondents are less risky because they have balance sheets and their reps and warranties are worth something: if a loan is fraudulent or otherwise does not correspond to what the correspondent says the loan is (on anything material), it can be put back. This does not remove the risk but does reduce it if you are careful about which correspondents you work with - and if those correspondents have other business going on, they are more diversified than any mortgage broker and more likely to survive.
You are right, of course, that they get rid of mortgage brokers quickly like any variable cost - but it’s a lot easier and cheaper to indirectly lay off a huge part of your operating costs through brokers than by cutting your own staff.
Daniel on 02 Mar 2009 at 4:21 pm #
Heh. Somewhat off-topic, this reminded me a discussion I had with a friend a few years ago about how the lending business differed between US and Brazil (my country). In Brazil, you get a loan if you prove you can pay it, either through collateral or through proven income. In the US, you can get a loan if you can prove you pay your loans — which is rather hard on adult people moving into the US, but whatever.
So… what happens when, suddenly, all those people who “pay their loans” suddenly stop paying? In fact, when even financial institutions stop “paying” their “loans”, and your whole criteria for lending is the borrower having a history of paying their dues?
Tony on 05 Mar 2009 at 1:46 pm #
Is this blog still alive?
Boston Mortgage Guy on 06 Mar 2009 at 1:07 pm #
Mr. Cringely,
I beg to differ with your conclusions. Here is some homework for you: find out what a typical contract between a bank and a Wholesale Broker looks like and compare and contrast with the contract between a bank and a Correspondent Lender. Pay close attention to the “reps and warrants.”
Cheers.
JP on 06 Mar 2009 at 7:27 pm #
Orphaned blog….?
Boston Mortgage Guy on 19 Mar 2009 at 8:19 pm #
JP — Not really orphaned… now that Cringely owns a mortgage company, (http://www.home-account.com/) he has learned the hard way that most of his posts are off base. Hopefully, he will suck it up and start posting again.
Out Through the In Door on 13 Apr 2009 at 8:44 pm #
Yet another dead blog. I’ve been dutifully checking back every couple of days for over 2 months but Bob lost interest in this fast. Up to my bookmarks… *DELETE* See ya.
MikeTeeVee on 14 Apr 2009 at 1:59 pm #
“checking back every couple of days”?
“bookmarks”?
Well, you could follow the RSS feed automatically with a feed reader, rather than checking bookmarks manually.
Tenaya on 20 Apr 2009 at 8:12 am #
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Hello?
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Is this thing on?
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TX CHL Instructor on 30 Apr 2009 at 8:25 pm #
Mr. Cringely has apparently bitten off more than he can chew.