I’ve talked to quite a few loan originators over the past month. My most recent conversation with a loan officer started out with an explanation of all the reasons why it was a bad idea to give up his autonomy and join a bank. During our discourse, I uncovered a hint as to what the third party origination (TPO) business model might look like in the next 2-3 years. My epiphany happened to coincide with what my partners and I believe the the small mortgage banking business model will look like in the future.
The new model is not really that new though. Several major secondary market conduits already use it. Our view expands the model to include mortgage brokers though.
Let me explain....
Many mortgage bankers today have “captive” relationships with investors whereby warehouse lines and loan sales are tied together. In other words, a warehouse line is provided to a mortgage bank by the investor, but the line is predicated on the mortgage banker selling all or a large percentage of their loans to the investor who provides the funding line. In some cases, the investor also provides underwriting, closing and secondary marketing support. This way mortgage banker can fund loans in their own name but leave most of the operations process up to the investor.
Returning to the above discussed loan officer, he has been approached by a large mortgage banker who is offering a packaged deal which includes a warehouse line and a secondary market take out facility. The deal allows him to continue functioning as a mortgage broker – in the sense that loans are reviewed by the investor, closing is performed by the investor, and all product and pricing is provided by the investor - but get’s to fund loans in his name. The only thing he has to do is draw the docs in his name.
He’s a broker in banker's clothing.
This is a sweet deal for a broker. They generate additional revenue and maintain autonomy.
There’s risk for both parties though. The mortgage broker may find their reps and warrants are more comprehensive in the banker relationship vs. those of a true broker relationship. The mortgage banker may find their profit margins shrinking because they're now sharing a bigger portion of their gain-on-sale with the broker. Plus management oversight and training costs would increase.
Regardless of the risks, this seems like a great alternative for mortgage brokers who don’t want to give up their autonomy and are willing to take some additional risk.