We live in a small town called Los Gatos that is located in Silicon Valley.  The population is around 35K people and is tucked in at the base of the Santa Cruz Mountains.  One of it's claims-to-fame is that it hosts the largest children’s Christmas Parade in the county.  It was held this Saturday.  Below is one of the entrants, the Stanford University Marching Band.

I had a meeting last week with another mortgage banker that is wrestling with the decision to stick it out on his own, partner with a stronger better capitalized entity like a bank or go work for a larger mortgage bank.  With net worth requirements of FHA, GSEs and investors continuing to increase, many owner operators are confronted with this decision. 

Let’s look at why you might select one:

1. Stick it Out on Your Own:  You’re an entrepreneur and don’t like having someone tell you what to do.   Can you compete as a regional wholesaler?  Probably not.  Can you compete as small retailer because of your long term relationships with borrowers and realtors? I bet you can.  Will you have the sharpest price to compete?  Probably not.  Does it matter and will it matter in the future to have a sharp price.  It probably will, but you’ve been doing that for a number of years already. 

2. Partner with a Stronger Entity:  As discussed in the past, small mortgage bankers should consider a partnership with a bank.  Many banks don’t have a lot of mortgage banking knowledge and will look to the operator to run the mortgage banking activities.  Will you have oversight?  Yes at the board level.  You will be accountable and need to make money without taking on much risk?  Yes you will be accountable and risk is a four letter word.  And remember you are now a regulated institution and will have visits from bank regulators.    Partnering with a bank solves net worth and liquidity problems.

3. Go Work for a Larger Mortgage Bank:  I guess if you need to make a living, you might select this one.  You are an entrepreneur that has operated your company for years.  You now ditch your freedom and compromise your character by becoming an employee.  You now have some politically driven manager that is telling you what to do.  He’s probably right, but it’s not right for you. 

Personally, I like number 2.  My recommendation:  If you are wrestling with this decision, go find a local bank to partner with.