PERSON OF THE WEEK: The wholesale mortgage market has always been competitive, but now that refinances are down and purchase loans represent about 70% of volume – plus home sales are being constrained by tight inventory – it’s become downright cutthroat.
On top of that trend, mortgage brokers are now competing with a relatively new force in the industry: The fintech lenders that threaten to intercept sparse business through technology and innovation.
To learn more about the challenges wholesale lenders and mortgage brokers face in this new environment, MortgageOrb recently interviewed Jeff Leinan, executive vice president of national wholesale production for Plaza Home Mortgage, a national leader dedicated to wholesale and correspondent lending.
Q: What’s the state of the wholesale market today?
Leinan: In a word: Competitive. Margin pressure is intense, and at the same time there’s a need to invest in new technology to support and keep broker clients. This is causing smaller players and lenders that had been testing the waters in wholesale to rethink their strategies.
To be successful in this market, a lender must be large enough to be able to offer a wide range of products such as agency, government, jumbos and non-QM. Plus, lenders need the scale and capital to invest in technology, operations and marketing.
Many of the technology enhancements that mortgage brokers today consider nice-to-have’s are soon going to be must-have’s. For example, brokers are increasingly interested in being able to disclose through their wholesaler’s system, and to have the lender guarantee the fees. As a smaller lender, it will be increasingly difficult to provide these technology options to customers and compete.
In the past year alone, our company has implemented an entirely new loan origination system; introduced online disclosures and docs; and announced a hybrid e-closing option for our agency business.
Q: Estimates call for a flat or slightly smaller origination market in 2019. How will successful brokers compete? Will they be focused on new products – and which ones?
Leinan: While the overall origination market will be flat, the wholesale share of that market is getting bigger. We’ve definitely seen an increase in new brokers, as originators are migrating out of the retail environment.
There’s a host of reasons for this. The economics, of course, is a factor. Loan officers are questioning the value they’re receiving from retail branches, and coming to the conclusion that the price differential may not be worth it.
They may say to themselves, “If I’m paying the house 150 basis points, but I don’t feel like I’m getting much in return for that,” and may begin to wonder, “Is this something I really need or want?”
In many cases, they can get that same support, whether in marketing or technology, in the marketplace for less than the pricing differential that they’re receiving from their respective employer.
Also, some of the larger retail lenders and banks are slow to add new products. Originators are seeing the wide array of non-QM products, renovation loans, and of course, reverse mortgages available in the market from wholesalers, including our firm. Their current employers may or may not be offering them. In an environment like this, every time you have to say “no” to a loan, it’s a little frustrating.
As to the second part of your question, there are three things brokers need to compete in a market like this. The first is product diversity, which can help in a number of ways.
Low inventory and high prices are forcing some buyers to “settle” for properties. As a broker, maybe one can offer a borrower the option of a renovation loan. If a broker can do that, they’ve not only increased satisfaction, but also eliminated a lot of the competition that either doesn’t have that product or is not going to take the time to work with the consumer on that product. So, putting people in the right product and having a broad product menu are really important.
The second is having the right technology that allows one to work with consumers, in the way they wish to be worked with. This will be particularly true for the next generation of home buyers. Working with a millennial borrower means one must have a great point of sale (POS) and the ability to be as digital as possible.
A successful broker must look at the business through their customers’ eyes and give them the experience they want. If that means sitting across the desk from them, then the broker needs to have that option available.
I think it’s important for originators to identify what the preferences are for their customers and work the way that they want to work.
The third thing brokers need are lenders that will help them protect their book of business. In recent years, large retail lenders, either through consumer direct or their retail branches, have gotten much better using analytics and processes to cross sell and retain customers at the expense of the broker.
Our company is all third-party origination, no traditional retail, so we don’t compete with our clients.
Q: Are mortgage brokers worried about competition with fintechs? If not, why not?
Leinan: New fintech entrants will be competitors for certain groups of customers and products, like refinances. But what the brokers have, that fintechs don’t, are relationships at a local level. They’re working with Realtors and attorneys, and they’re getting those purchase referrals.
That’s not to say that a borrower may not start the education process by calling an 800 number and getting a pre-qualification. But when the customer starts working with a Realtor, they’re most likely going to get a referral, and there’s a good likelihood that that referral is going to be to a mortgage broker.
The advantage a broker has, as I mentioned earlier, is the ability to address the customers’ needs and work with them the way they want to be worked with – whether that means in person, over the phone or online.
Now, obviously, the goal of the fintechs is to reach out to that consumer before they begin the process, and I think that they are fairly successful at that. The question is, can they hold that consumer through the entire process or do they end up making an application with another mortgage professional, hopefully a broker?
Also, most fintechs are structured to serve generic borrowers with great credit scores, money in the bank that doesn’t move around, and stable jobs with consistent earnings. That’s certainly a segment of the market, but I don’t think it’s the majority of the market. During the application process, there’s usually something that needs to be addressed and that’s where the obvious benefit of working with a mortgage broker comes in. They have the ability to see that information ahead of time and identify it and figure out how to mitigate it before it becomes a problem.
Q: AIME and NAMB are asking mortgage brokers to pick sides and promising new tech tools. Is this good or bad for the industry?
Leinan: I don’t think it’s a matter of picking sides, but rather creating options for brokers. Each system is different and might be attractive to a different segment of the industry. I think most of the industry has their LOS already and possibly or rather hopefully, their POS options as well.
However, there are advancements in the marketplace that brokers should be aware of.
Getting brokers to change, or migrate from, their technology is always a challenge. I do think there are a lot of options in the industry today besides these two.
It’s important that wholesale lenders try to cater to the majority of those technologies to make sure that they support as many brokers as possible. At our firm, we’re working with both organizations to do more for brokers.