You’ve secured your warehouse line. You’ve got a solid production staff. You have great correspondent relationships in place. So what else do you need to know about running a mortgage wholesale business? Plenty, according to a pair of presenters at a recent Mortgage Bankers Association of America (MBA) event.
Speaking at a session entitled Building a New Business: How to Create a Successful Wholesale Operation from the Ground Up, Annette Tirabasso and Terry Rowland handed out advise for prospective wholesalers. The session was part of the MBA annual conference held in San Diego during October.
“Mortgage banks are entering what is likely to be a fierce battle for a share in a shrinking market,” said Tirabasso, who is a principal with Deloitte & Touche, LLP. “Growth by acquisition has become less useful. Instead, mortgage banks need to grow organically, and more importantly, innovatively.”
She noted that competitors from other industries, such as automobile manufacturing, real estate, and insurance, are leveraging their positions in their industries to compete in the mortgage market.
“If thinking about investing, the goal is to skip a generation,” said Tirabasso. “Don’t invest for the next year or two, but for the next five to ten. A simple example would be skip the imaging of documents and go straight for e-capability and doing everything based on the Internet in the e-mortgage environment.”
“There’s good news and bad news if you’re going to be building a wholesale organization,” said Rowland, who is with RBC Mortgage Company. RBC announced in May its agreement to purchase Bank One’s wholesale operation, a unit that reportedly funds $5 billion annually. RBC says it was founded in 1992 as a two-person office near Chicago’s Wrigley Field.
“The good news, first of all, is that there are very few barriers to entry. If you’re already in the retail business…there is really not much you have to do to start doing wholesale lending,” Rowland said. “You can certainly leverage your existing operations and back office structure.”
The bad news is that the market will take advantage of wholesalers that don’t understand broker behavior and hedging. As an example of not understanding hedging, he pointed to the recent Capitol Commerce failure which, “given the current environment, will probably not be the last.”
Rowland said that prospective wholesalers can attract significant additional volume if they’ve got good products now, and they can test new markets where they currently have no retail presence.
He cited excess warehouse capacity and productive back office operations as good reasons for starting a wholesale mortgage operation. Also, the retail operation can actually benefit from a wholesale shop, he said. “Why would you deal with Sally at this brokerage shop for our product when you can directly with me?”
Rowland cited as bad reasons to start a wholesale operation: dissatisfaction with returns on retail business, as wholesale is about half that of retail; poor backroom operations, as more volume will just increase problems; no investment needed in technology — in fact, more technology is needed for brokers that demand (and get elsewhere) immediate answers and information on their applications.
Lenders can expect a lower closing rate with wholesale versus their retail operations, and applications from brokers that don’t match the packaging quality and consistency of in-house retail operations, he said. It is also possible to encounter brokers that use fraud, so it’s important that the wholesaler reviews the broker’s activity pre- and post-closing, performs a recertification on its brokers at least annually, and make sure its brokers “understand what you intend to do to their loans to make sure the loans are good.”
Pricing can be used to moderate volume, Rowland continued, and a professional sales force can help brokers successfully structure deals by being well-educated about the programs. Human resources will also be needed for brokers to contact about loans in process and for the broker approval process.