Reforms Aimed at Broker Business. Deploying Capital to the Right Origination Channel
Everywhere I go these days mortgage bankers are asking the same question: “What’s the future of the wholesale channel and will brokers go extinct?
Congress and regulators are focused on the origination practices of
mortgage brokers. Whether it is licensing, disclosure of fees,
selecting appraisals or compensation, most changes seem to be aimed at
brokers. The flexibility brokers once had has diminished over
the past 2 years. It appears the retail loan officer, especially one
working for a national bank, has an advantage over the independent
Still, I believe the mortgage broker plays an important role in the mortgage origination process and will survive the current “witch hunt”. Here are some thoughts based on my recent discussions with clients and contemporaries.
What do Bank of America and Chase know that the rest of the industry doesn’t? Why have they decided to ditch wholesale and focus on the retail and correspondent channel?
From my perspective, it is very simple. They make more money in the retail and correspondent channel and have less risk of losses. The GSEs have confirmed that the TPO channel has a higher percentage of fraud and loan losses. In the many reviews we've performed over the past 3 years, the TPO channel has a higher cost of origination and lower overall margins as well.
Another way to analyze this is the deployment of capital and return on capital. If a company can generate a higher overall return on capital originating retail loans over wholesale loans, it doesn’t take long to figure out where capital should be deployed. Today, I believe retail provides a higher total return on capital than TPO. This may change as rates move higher and retail players have large fixed expenses to deal with, but currently, retail prevails.
Brokers and the TPO channel will survive. It will be different than the TPO channel model of the past as brokers will be required to have more “skin” in game than before in the form of capital, reps and warrants, etc. The smaller regional wholesale mortgage bankers seem to be taking up the slack as the larger players exit. Smaller players are nimble and seem to be exploring new approaches to tap into broker originations. Tighter partnerships between these regional wholesale players and brokers may emerge to help keep the channel viable. Let’s hope it happens.