Mortgage brokers generate more loans than any other origination channel -- especially with nonprime borrowers, according to a new industry report. But a decline in overall production and consolidation within the industry could change that.
The Mortgage Bankers Association concluded such in its Residential Mortgage Origination Channels report, which was done to provide some clarification regarding terminology surrounding the different origination mediums.
MBA estimated that the half of all originations come from wholesale channels -- although the broker share is near 70 percent for subprime mortgages -- and that retail loans contribute about 45 percent of overall volume and direct marketing channels the remaining 5 percent.
The largest mortgage companies originate multi-channel loans; through their retail branches, direct channels over the phone or Internet and from brokers or through purchasing correspondent business. Smaller or midsize lenders tend to operate retail and wholesale channels (broker and correspondent), according to the report.
Specialty finance companies have relied on wholesale channels more than prime lenders and have accounted for most of nonprime originations. However, because today's largest lenders and integrated financial services companies are involved in lending across the credit spectrum, it is unclear whether they'll use brokers to the same extent specialty finance companies did and if the higher broker share for subprime business will sustain.
"It is quite difficult to consistently and accurately describe the share of loans that are originated through retail, broker, and correspondent channels," MBA said in the report. "This difficulty accounts for some of the widely varying estimates that are frequently cited."
MBA cited a study of the top 60 originators which showed the share of retail loans diminished from 44 percent in 1996 to 40 percent last year, broker business increased by about 9 percent to 31 percent, and the correspondent share decreased by 6 percent to 28 percent of all loans.
MBA assumed the broker share and retail share of correspondent business is evenly split, respectively at 45 percent and 54 percent. But considering that economic incentives to the broker might lead them to work directly with a large rather than a small lender, and that consolidation trends show that larger lenders have more rapidly gained retail market share, the broker and retail shares of correspondent volume could be higher or lower.
Research on wholesale lending trends showed that lenders' production was composed of 43 percent retail originations in 2005, 31 percent broker and 26 percent correspondent business. While most of the top 10 wholesale lenders analyzed had both broker and correspondent channels, different lenders relied more heavily upon these different channels, MBA noted.
Through the past several years of ongoing consolidation in the origination side of the business, retail and correspondent channels have become concentrated to a greater extent among the top 15 lenders than the broker channel. The top 15 contributed more than 80 percent of all retail originations, almost 90 percent, but less than 67 percent of broker volumes.
MBA concluded that while it is likely that mortgage brokers are involved in about half of mortgage originations and the broker share is considerably higher for subprime loans, market analysts should continue to track these shares given that mortgage volume is expected to decline to $2.34 trillion this year and be at $2.41 trillion in 2007, and different segments of the market might fair better or worse in a period of declining total originations.