The Unexpected Return of the Independent Mortgage Banker

Independent mortgage bankers, once written off as an endangered species, are making a comeback in the third-party origination businesses abandoned by banks since the financial crisis.

United Wholesale Mortgage, for example, has become the largest lender funding loans through brokers, with over $2 billion of originations in this channel and a nearly 9% market share in the third quarter, according to MortgageStats.com. In the first quarter of 2007, the No. 1 wholesale lender was a more familiar name: Wells Fargo, which had volume of over $59 billion and a 34% market share then.

Meanwhile, upstarts like New Penn Financial (founded in 2008, the nadir of the industry) and HomeBridge Financial Services are expanding in the correspondent loan business.

Banks fled wholesale and correspondent lending in large part out of concern they could not control the quality of loans they funded or purchased from third parties. They left a void that "fearless," entrepreneurial companies are now filling, says Bob Rubin, a consultant with The Business Loan Connection in Southfield, Mich.

The larger players are not only losing customers, they are also losing "fabulous employees who were the bread and butter of their company," Rubin says. "A lot of these younger places are really taking advantage of this and looking at it as an opportunity on how they can grow their franchise and increase their net worth."

The MortgageStats third-quarter data shows that three of the top five wholesale lenders, and six of the top 10, are independents — underscoring how this third-party origination channel has contracted and grown more diverse since its heyday.

Last year United, in Troy, Mich., made a series of changes designed to keep it the No. 1 wholesaler not only this year, but in 2015 and beyond.

"If we're getting better, someone is going to have to get a lot better to come back and catch us," says Mat Ishbia, United's president.

The wholesaler is a subsidiary of United Shore Financial Services Inc., which also has a retail unit, Capital Mortgage Funding, and a call center lending operation, Shore Mortgage. Besides running the wholesale operation, Ishbia is CEO of the parent company.

In October 2012 United Wholesale's management met and starting planning for a rate rise it expected to start happening in 2014. "We were wrong, they went up in 2013," Ishbia says. But the management team got one prediction right: UWM would become the largest wholesaler by volume if it could get its home purchase business up to 60% of its total production. By achieving the latter target, it became less reliant on refinancings, a business that dries up when rates rise.

The company came up with a list of strategies to make the company more attractive to brokers. One of those was to aid brokers' marketing efforts to real estate agents. United created a marketing portal, offered free to brokers, where they can place their name and contact information on prepopulated marketing pieces such as flyers and direct mail items.

Another item on that list was to give the brokers something to keep the real estate agents involved in a transaction up to date on the status of a loan application. So the company created UWM Track, which provides enough information to the real estate agent that they no longer have to phone the loan officer so often.

To help answer questions about the new regulatory ability-to-repay requirements, UWM gave brokers access to the internal income calculators used by its underwriters. This provides an insight into how UWM determines income when qualifying a borrower. The broker can then go to the customer and real estate agent and say, with a level of certainty, if the consumer will qualify for a loan, Ishbia says.

UWM is one of the few lenders that say they plan to offer a non-qualified mortgage loan product in the wholesale channel. It is still deciding when it is going to make the product available.

Part of the holdup is all the other initiatives UWM is bringing out, which also include a mobile app. "I am hesitant to roll out too many things at once," Ishbia says.

The company has been named a Tech Savvy Lender by Mortgage Technology magazine. It developed a proprietary "Account Success Report" that tracks and analyzes the loan quality, efficiency and production of its broker partners.

UWM sits down with brokers to pick their brains about what they are looking for from a funder. The company decides which ideas are best, prioritizes and rolls them out, Ishbia says.

New Penn Financial, based in Plymouth, Pa., is now making loans guaranteed by the Federal Housing Administration and Department of Veterans Affairs through its mini-correspondent and correspondent channels. Previously, the only third-party outlet for these loans was through the wholesale channel.

(Like the traditional correspondent business, mini-correspondent involves one lender buying closed, funded loans from another. However, the purchasing lender usually does not allow a mini-correspondent to underwrite the loans, or if it does, it is to very tight specifications. Sometimes mini-correspondent loans are funded through a captive warehouse line extended by the purchasing lender to the originator.)

New Penn does not allow delegated underwriting of FHA or VA loans in its mini-correspondent channel, as it does in the regular correspondent channel. One reason it started the mini-correspondent channel a few months ago has to do with a ripple effect of new regulations. Many brokers are considering making the switch to mortgage banker so they can close loans in their own name and thus avoid the qualified mortgage rule's 3% fee cap, says Brian Simon, New Penn's chief operating officer. (He likes to refer to mini-correspondent as "wholesale-plus.")

"But in general, it's another channel of business," Simon says. "With refis fading away, all those things everyone was relying on last year, there are fewer loans. So, as a purchaser of loans, we need to be able to purchase loans through every vehicle available to us."

Operational complexities with government products previously kept New Penn from doing them in the correspondent channels. Sellers needed FHA approval and to be compliant with the agency's rules (FHA no longer approves mortgage brokers; that authority rests with the wholesale purchaser). It was easier to do conventional loans in the new mini-correspondent channel and New Penn wanted to have its processes established there before moving to the next level of complexity.

Adding these government loan programs should be a significant business driver for New Penn even as the government does its best to discourage FHA lending by raising the mortgage insurance premium. There are many mini-correspondent purchasers that will not buy government loans because of the kind of operational issues that once dissuaded New Penn. Plus, many of the parties it sees as prospective clients sell and service loans for Fannie Mae and/or Freddie Mac but lack Ginnie Mae issuer approval, Simon says.

It not might become an overwhelming part of New Penn's correspondent purchases, but Simon says his company wasn't getting its fair share of conventional business because it did not offer the full range of products until now. Rather than splitting their loan deliveries, sellers can deal with New Penn for all loan types. "They can deliver us virtually any type of product in virtually any one of the third-party delivery methodologies," he says.

New Penn plans to offer U.S. Department of Agriculture Rural Development loans through the mini-correspondent and correspondent channels in the near future. Besides the three third-party channels, New Penn also does retail originations through a branch network as well as operating a call center.

Another independent which has added a correspondent aggregation business in recent months is HomeBridge Financial Services Inc. in Iselin, N.J. But it is not just in the third-party channels the company wants to grow. It plans to aggressively expand its retail branch business, says Peter Norden, HomeBridge's CEO. It already has close to 80 branches and it is hearing from quite a few more teams that are looking to join. By the end of 2014, it should have over 100 branches.
Until recently HomeBridge was known as Real Estate Mortgage Network, its name since its 1989 founding. One of its two wholesale operations will continue to operate under that name; the two units (the other already had been using the HomeBridge name) are free to compete against each other, Norden says.

HomeBridge started buying loans through the correspondent channel nearly six months ago. Its job is to feed the company's servicing portfolio and help it grow to around $25 billion in two years. Currently, the portfolio is $9 billion, Norden says. The company is shooting for $1.5 billion in originations through the correspondent channel.

The $1.5 billion target is a realistic one and HomeBridge does not want its growth in the channel to get ahead of its capabilities, he says.

HomeBridge is aiming to do $8 billion in total volume this year, up from $6 billion in 2013 and nearly $5 billion in 2012.

The company has a purchase orientation, shown by the fact that the refi share has never exceeded 48% in its history, Norden says. Last year, it did 64% purchases. Loans to homebuyers now make up about 80% of HomeBridge's business.

Nearly all its volume last year was in agency-eligible loans and that remain will be the case. But it is looking at some opportunities in the jumbo market. However, HomeBridge's management is not comfortable enough in the current environment to add this product because right now the jumbo market is not liquid enough. That will change once people get more familiar and comfortable with the new regulations, Norden says.