The Next Chapter In Wholesale

On July 12, San Francisco-based Wells Fargo & Co. issued a press release announcing that it agreed to a $125 million settlement with the U.S. Department of Justice (DOJ) regarding long-standing claims that the lender engaged in discriminatory actions against African-American and Hispanic borrowers. Four paragraphs into the press release, however, the company abruptly announced another development.

‘While not part of the DOJ settlement, Wells Fargo, on its own volition, also announced today that on July 13 it will discontinue funding mortgages that are originated, priced and sold by independent mortgage brokers through its mortgage wholesale channel,’ the company said. ‘Mortgages sold by independent brokers in this manner currently represent five percent of the company's home mortgage funded volume. Mortgage brokers operate as independent businesses and are not employed by Wells Fargo. Therefore, Wells Fargo cannot set loan prices for independent mortgage brokers nor control the combined effect of the negotiations that thousands of these independent mortgage brokers conduct with their customers.’
Across the industry, Wells Fargo's decision has brought mixed reactions.

‘It was reprehensible that Wells exited as quickly as they did,’ complains Matt Ostrander, CEO of San Francisco-based Parkside Lending. ‘It was irresponsible for their business partners – some mortgage brokers worked with them for years, and Wells commanded most of their volume.’

‘Any time a large player like Wells leaves is not a great thing,’ says Mat Ishiba, president of Birmingham, Mich.-based United Wholesale Mortgage. ‘We like to see as many outlets for our broker customers as possible.’

Other industry leaders are less agitated by the development.

‘It was not a huge surprise,’ says John Walsh, president of Total Mortgage Services, based in Milford, Conn. ‘We knew it was inevitable.’

‘Only five percent of their business was wholesale,’ says Marc Savitt, president of the National Association of Independent Housing Professionals. ‘A lot of brokers already left Wells because of their underwriting practices – the brokers felt they were not treated as valued customers.’
Savitt adds that this development will ultimately have minimal impact on the wholesale mortgage market. ‘With Wells gone, there will be little to no effect,’ he says.

However, not everyone is as sanguine about this newly reconfigured sector.

‘Brokers are where people go locally for lending,’ explains Andrew Peters, CEO of McLean, Va.-based First Guaranty Mortgage Corp. (FGMC). ‘When brokers lose outlets, that hurts. It could be a ripple effect throughout the housing industry.’

Chris Sorensen, founder of the Los Angeles-based Homeownership Education Learning Program, concurs, adding that a specific market will bear the brunt.

‘This will hurt more minority borrowers than it helps, because brokers are often entrenched within the minority communities and are often the best resource for a local borrower,’ he explains. ‘It is where minority borrowers feel the most comfortable applying for a loan.’
The connection to minority borrowers may have also played a role in Wells Fargo's decision, even though its July 12 press release said otherwise.

‘Wells was hit with a very, very large fee,’ observes Robert Rubin, principal at The Business Loan Connection, based in Southfield, Mich. ‘They may have felt real jeopardy in doing business with mortgage brokers.’

A number of industry leaders believe that Wells Fargo's decision was the culmination of numerous circumstances beyond the lender's control. John Robbins, CEO of San Diego-based Bexil American Mortgage, points to Basel III as playing a role in the decision.

‘Prior to 2011, 100 percent of mortgage servicing rights (MSRs) could be calculated in tier-one capital,’ he explains. ‘But as a result of the Basel changes, by the end of 2015, no more than 15 percent of tier-one capital can be comprised of MSRs. Ultimately, that influenced Wells' decision to exit the broker space.’

Joey McDuffee, director of Franklin, Tenn.-based Wipro Gallagher Solutions, notes that another external pressure can be pegged as a major influence on Wells Fargo's decision.

‘The Consumer Financial Protection Bureau is holding lenders accountable for third-party partners – including brokers,’ he says.
‘All larger banks are under a great deal of scrutiny right now,’ says Rick Sharga, executive vice president of Santa Ana, Calif.-based Carrington Mortgage Holdings. ‘As a result, it appears all banks are looking to take a conservative approach into the market.’

So what happens to the wholesale space with Wells Fargo out of the picture? Sharga does not expect a vacuum to persist.

‘You'll find nonbank lenders will probably look to fill the void and take advantage of that,’ he predicts.

‘There is going to be an opportunity for the No. 3 and No. 4 players to step up,’ says Jon Woods, president of Citizens First Wholesale Mortgage Co., based in Lady Lake, Fla. ‘We will see a lift all the way down the food chain. But those lenders that already have the infrastructure to handle the volume will benefit. Smaller companies may see a lift, but I am not certain if they can handle the influx of volume.’

Total Mortgage Services' Walsh believes this new flurry of wholesale competition will ultimately help the industry.

‘People will come into the space, and that is healthy,’ he says. ‘Wells was doing one out of three mortgages – that is not healthy. This will give others the opportunity to grow market share.’

And FGMC's Peters notes that despite its announcement, Wells Fargo has not entirely vanished from the picture.

‘Wells will get the loans anyway through their correspondent and retail channels,’ he says. ‘The broker channel was simply where Wells had the most exposure and highest risk.’

Phil Hall is editor of MortgageOrb. He can be reached at


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