Brokers, Wholesalers Doing More Online

Such findings are outlined in TowerGroup’s report, Wholesale Mortgage Lending: Online Lending Adoption, Lender Segments and Technology, authored by Craig Focardi, director of the firm’s Consumer Lending research service.

Wholesale lending on the Web grew to 21% last year from 15% in 2001, compared to online retail lending’s pace of 7% from 4% in the same time period, TowerGroup said.

The still-evolving wholesale lending systems, which include Web site hosting, loan product and price management, and third-party settlement services, have become mission-critical for virtually all wholesale lenders, according to the research firm.

IT spending by wholesale lenders as well as the number of technology vendors has grown rapidly in recent years. One reason for this is that wholesale lenders are less burdened by the necessity of branch hiring and office expansion during interest-rate-driven production cycles, according to the report.

Thus, regardless of the interest-rate environment, TowerGroup said it expects online wholesale lending to continue growing as it estimates only 40% of the top 100 wholesale lenders have comprehensive wholesale lending systems.

The top 10 lenders require custom system scalability to support 5,000 to 10,000 mortgage broker firms and 20,000 to 50,000 loans per month, the study said, but few have in-house wholesale lending systems. The advanced systems they require brings mortgage IT expenses between $100 million to $175 million total per lender — with upfront costs ranging from $5 million to $20 million.

Total costs decline significantly for each of the next 20 largest lenders to a range of $25 million to $90 million.

Many midsize wholesalers have resisted adopting IT, the report said, because of the high costs and fewer loans to spread the expense over. This group tends to want more turnkey systems with less customization and lower upfront development and licensing costs. TowerGroup estimates that the upfront IT spending costs for wholesale lending system development and implementation ranges from $150,000 to $1 million and annual operating expenses, including transaction fees, range from $100,000 to $500,000.

But to “avoid being at a disadvantage with respect to cost, price, and service, midtier wholesale lenders need more IT to remain competitive and grow,” the author said in the report. A “critical decision” for such companies is to select at least the minimal level of IT functionality.