May 12, 2023

Mortgage Careers >> Retail VS. Wholesale & A Better Way

Retail VS. Wholesale

Why and for who?

Brokers started to make a noticeable resurgence in the 2018 post-Trump election, which had a residual effect of rising long-term interest rates. Margin compression set in, and volume fell. The broker associations and a few growing brokers effectively sold the industry that brokers offered lower rates, more loan programs, and faster service than “retail” operations. Since most originators in the industry have nothing but rate to sell, the audience was captive. The message being delivered by the broker community was only true depending on one’s perspective.

Not that any in our industry care. Unfortunately, the same thing can be said about our regulators, but it doesn’t seem that the brokers largely care about abiding by the laws that were implemented to protect the very customers they boast to serve. Over the years I have spoken to hundreds of originators that work for brokers, and owners themselves, and I have yet to find one that abides by these laws. I am not stating that they are all non-compliant; just never met one that was. To be completely transparent, I cannot confirm if they intentionally violate these laws, as they all seem to be completely ignorant of these laws, most notably the Loan Originator Comp Rule and Fair Lending. Meaning it may solely be due to incompetence. Regardless, ignorance is no excuse. Nor do they seem to understand the responsibility of paying W2 employees a legal minimum wage, but that is a separate subject for a later time.

Brokers commonly will change wholesale lenders based on pricing. That may in and of itself not be a violation, but when it changes the originator’s comp transactionally it is. If moving the loan from say UWM priced at 275 BPS to a Provident at 200 BPS, and that changes the originator’s compensation, you have an LO Comp violation. If you send all of your files to UWM at 275 BPS, and then find yourself quoting a “sophisticated” borrower at Provident at 200 BPS, you not only have a LO Comp violation (assuming originator’s comp changes) but could also find yourself in a much more serious Fair Lending violation. Are your “sophisticated” borrowers of a certain race, sex, nationality, age, etc? Do your borrowers in the technology industry get brokered to the same wholesaler, and the same lender-paid comp as your borrowers in the service industry? Of course, not. You never discriminate.

From a pricing perspective, are brokers cheaper?

They certainly can be. Compared to “retail,” brokers have less overhead. They do not employ the operations required by a banker that has the ability to fund their own loans. Aside from not having to employ underwriters, closers, etc, they most noticeably rarely, if ever, hire a compliance team. Why should they? The wholesalers they broker to turn a blind eye to their business practices. The consumer doesn’t know that they are changing the price based on their “sophistication.” Most states don’t regulate the Federal laws they violate. Finally, the net worth requirement for most brokers is less than $100K, so they have nothing to lose if caught in a violation. The Feds rarely if ever conduct compliance audits on brokers, as there are no assets to fine. Due to the fact the consumer is rarely aware that they are being charged differently based on a “class,” there are no complaints to the Feds, which is typically how a compliance audit is initiated.

Do brokers have more loan programs?

They may. Once again driven by risk vs reward. Do the highest-risk loans, that bankers deem too risky because there is little recourse to the broker. Again, no assets to seize due to limited net worth requirements. Brokers may be far more willing to originate a loan with high-risk characteristics as there is little recourse to the broker if something goes wrong. This begs the question, should brokers be held to a higher standard as the bar has been set exceptionally low? Maybe in the interest of the consumer, and the industry, higher net worth requirements should be required of the broker to enhance lending standards.

Lastly, there are labor and industry laws regarding the payment of employees. Most brokers do employ full-time W2 originators. Well, full-time if they close a loan that month. Everyone else was on leave, or part-time to avoid minimum wage laws.

Brokers are better. Why and for who.

We saw the sharp rise in brokers in 2022. Rates sharply skyrocketed diminishing loan volumes. The industry, led by wholesalers, dropped margins to negative profitability. That is what happens when you come off historic business highs seen in 2020 and 2021, followed by a catastrophic rise in interest rates sending loan volume off a cliff. All the loan originators that “don’t sell price,” (wink wink), chased rate to the grave as they have no other value to sell. Those of you that continually state “We all sell the same thing;” we do not. The true professionals didn’t lower their value (i.e. compensation) just because there was less volume and more competition. In fact, when times get tough, the true mortgage professional’s value goes up; not down. What you get paid is a direct reflection of your value.

From an originator perspective, are brokers better?

Brokers constantly accuse retail of taking advantage of the consumer and overcharging borrowers. Then let’s define how much is too much. Doesn’t this depend on several variables? Ability to perform. Customer service. Ease of transaction. And most important, the true professionalism of the originator. Are all loan originators equal? If someone is willing to work for 100 BPS, it does not mean that someone charging 300 BPS is overcharging. Are there originators that are worth an extra 200 BPS? Absolutely. Don’t fret, if you do not think you are worth 300 BPS, then you are not. Don’t cast stones at someone who is.

Companies, most notably UWM, capitalize on the industry’s weakness and accommodate by strategically funding loans at a net loss to gain market share. Not only is the purchaser of the loans intentionally taking losses, but originators compound the compression by transactionally lowering price and compensation to try to scrape together what business they can while leading with price. Often lowering rate and compensation (not legally) before they even get a rate/shop objection, but simply because the originator is conditioned to be even more rate sensitive than their customer. Brokers flip to “borrower paid” from “lender paid” lowering their value at every opportunity. Leading to the question of what value did they offer in the first place. All the while the wholesale lenders turn a blind eye to the endless violations occurring at origination, as they seem to have no fiduciary or legal responsibility for those things out of sight and out of mind. Again, it begs the question, why do correspondents hold independent mortgage bankers to much higher standards than the wholesale lenders do with brokers? If you care about the consumer you must care across all channels.

Where are things going?

After over a year of funding loans at a loss, most wholesales, including larger mortgage bankers have had to start raising their margins. You can only bleed for so long. The industry has been lending with blind optimism that volume would tick up far sooner than it has. Q1 of 2023 was down nearly 62% from the Q1 of 2022. Now many wholesale lenders that boasted the “lowest rates” find themselves forced to raise corporate margins as long-term interest rates slowly move downward. They still promote “lowest rates” maybe in the hope that their captive audience won’t notice. Did you sign a contract that prohibits you from using other wholesalers? Oops. Didn’t think that one through, did you? How many herds of sheep were created in 2022?

It is easy to cast stones at brokers and wholesalers who have championed the “brokers are better” mantra of price over ethics, but most bankers are equally to blame. The larger “retail” lenders also strategically drove margins to the grave; not that they were in any way trying to give the prospective customer a deal, but to stop the attrition of originators that had nothing more to sell than price. Catering to their weakest link they appeased their branch managers and loan originators by willfully funding loans at a net loss to the company and often the branches. Granted, companies have the right to choose how they conduct business.

This practice by independent mortgage bankers also has a grave toll on its employees. Originators who lower price due to competitive situations, or for their own price sensitivity typically follow the company policy of submitting the loan as a “branch lead” versus self-generated” whereas the company can now pay them a reduced compensation when the price is lowered for the consumer. Another violation of federal law, as the loan was not generated by the branch or company and was in fact self-generated, further harming the originator, who often unknowingly agrees to this practice without realizing that their manager and/or company is violating a federal law designed the protect the customer. Yes, if this is happening to you, your company is stealing from you. It is not legal.

It needs to be noted that not all companies abide by such illegal and unethical practices, but it is far from a one-off. It may be more accurate to say it is a one-off for a mortgage banker not to have policies that are crystal clear violations of the law in place and as a standard policy. Most licensed originators have never read any law that regulates their business practices. Could it be the owners of so many mortgage bankers and mortgage brokers have also not read the rules they are supposed to abide by to protect their very customers? And employees. I would guess yes, as I have not met one that has read Fair Lending or Loan Originator comp laws, but only pay a compliance person to figure out how to circumvent these regulations.

Are brokers better?

The largest mortgage broker in the country now has a correspondent division, i.e. retail. They recently posted a video stating it doesn’t make sense for anyone to start their own mortgage brokerage, and just join his company. There may be some truth to that, but doesn’t it rival the word of their sworn king? The CEO of the largest wholesale lender constantly promotes the independent mortgage broker. Sacrilege. Who should the flock listen to now?

The former president of one of the largest broker associations, who spearheaded the “brokers are better” mantra, now is the CEO of a retail banker. Often referred to as the retail arm of the biggest wholesaler.

The next step is to reclassify what “retail” means. Maybe, just everyone who is not them should be deemed “retail.” Wait for it. The new terminology is coming to shame the independent bankers and the “small” independent brokers. No doubt they will be effective in act two.

Next: Why Geneva Financial, an Independent Mortgage Banker, outperforms “Retail” and “Brokers.”

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