Dead Man Walking - Wholesale Lending is Marching Towards Extinction

Mortgage and Lending with Prime Processors, Inc.

Dead Man Walking - Wholesale Lending is Marching Towards Extinction

Published at October 15, 2007 in Mortgage Musings. Tags: , , , , .

There has been a whisper in the mortgage-lending winds, subtle at first, but growing louder everyday: wholesale lending by mortgage brokers is on its death bed.  It hasn't been proclaimed, in fact the big players are adamantly voicing support for their affiliated brokers, but the actions of large banks belie their big talk.  For all of the kudos and reassurances as an important business channel lavished on top of brokers by lending institutions, the rug is slowly and silently being pulled out from under the broker population.

This isn't a conspiracy theory - the facts are clear for all who choose to look past the PR spin put out by lenders; whose only motivation is to drain the last red cent out of this feeble business model before finally cutting off its oxygen with the heel of their mighty boot.

If you don't see the change, it is because you are blinded by both the slow, silent moves of the attack and your own hopeful optimism of a return to normalcy.  But there will be no return; for the mortgage broker's days are numbered.  The forces are aligning now, the outcome is certain, the only question that remains is the timing of the fatal blow.

But enough with the theatrics you say - tell us where this preposterous idea is coming from.  It came from everywhere, at once, and it showed its cards with a careful examination of the mundane.

First, more than one employee, from more than one large lender, has confided in me that it is apparent that their employers are anxious to end wholesale.  They cite the layoffs being more frequent and severe in the wholesale staff when compared to those in the retail channel.  They point to the unfavorable program guideline and interest rate changes affecting only wholesale channel partners; changes somehow absent in internal retail-facing mortgage originator playbooks.

Second, employees are being moved around.  The good ones that is.  Good wholesale operations people are being moved inside to support retail origination; good managers are being brought in to run retail teams, good wholesale underwriters are being brought inside.  The best of wholesale are being moved to retail, one-by-one, decimating the wholesale ranks and fortifying the the retail channel.

Want hard evidence? Keep reading.

Third, an email from Mike Perry, CEO of IndyMac to his employees highlights the success that IndyMac has had in minimizing the effect of layoffs on the company.  On the surface, a seemingly positive email,  it instead points to a clear strategic effort to let wholesale lending bleed to death.  From his email:

"It is also important to note that, even with our staff reductions, we have still grown our workforce year-to-date from 8,775 to 9,394, as we have built our Retail Lending Group from under 100 people to roughly 2,000 today. In so doing, we have really re-made our workforce and "sharpened the point of our spear," with a major shift toward revenue-generating personnel,"

This is a blatant move towards blostering productivity to replace the inevitable elimination of their wholesale revenue channel.

Fourth, Countrywide's recently released statistical analysis of the previous 13 months' originations (PDF) show a massive reduction in wholesale volume, while retail channel origination suffers to a significantly lesser extent.  A year ago (Sept. 06) Countrywide funded 78,388 loans via its retail lending channel.  For the same month Countrywide funed 35,448 loans via wholesale.

In September ‘07 the retail lending group funded 56,520 units compared to the 15,844 loans funded via the wholesale channel.  This amounts to a 27% drop off in retail production year-over-year; compared with a stagering 55.3% drop in wholesale production. That is almost a 2:1 drop in production in the wholesale channel v. retail conduit.

It is clear that Countrywide has (like IndyMac) chosen the horse to ride through the storm; and that horse is the retail lending channel.

Finally, Bank of America made clear on page 66 of their 94 page Q2 2007 Investor Factbook that the "Key Business Strategy" for their First Mortgage products is retail. (PDF)

"Bank of America is focused on increasing the volume of mortgages in direct-to-consumer channels, including Banking Center and Retail Sales channels."

It can't be any clearer than that.  And while this may not be a surprise to those that have watched the scape-goating of mortgage brokers reach a fever-pitch by the mainstream media and lenders looking for an easy villan in the current housing mess; the momentum behind the elimination of the mortgage broker is gaining quickly.

Why the change?  The answer is two-fold. First and foremost, investors that buy the securities will pay for the protection that a retail origination provides them in assuring a quality underlying asset in those securities.  They will pay less for the risk involved in a loan origination made from a removed party.  Studies have shown that wholesale originations perform worse than retail; and while you can argue all day that it is the same bank underwriting the loans, in the end investors will buy what they feel confident in - and that is retail originations.  Banks won't waste time or effort to sell an unsellable product at a loss; and that is exactly what is happening with wholesale originations.

Second, the court of public opinion will demand a fall guy for this mess; and probably more than one.  While everyone is pointing out Angelo Mozilo, watch for the mortgage brokers to take the brunt of legislative changes and regulatory action that will shut that channel down.

As a mortgage broker myself, I am convinced that the days of wholesale lending are numbered.  That the public and politicians will demand, like they do in any crisis, that heads be served on a platter.  Some fall-guy must be identified and publicly hung to restore the faith of the masses; the reasoning will go, and who better than the ill-capitalized, poorly defended mortgage broker?

Lest you start to think that I am a broker-sympathizer, let me reiterate my disdain for the majority of people in my industry.  Let me refer you back to the, now more than, 600 articles outlining the absurdity and attrocity that is mortgage brokering and lending.  Let me remind you that I have written extensively on the fraud perpetuated by mortgage brokers.  Let me clearly state that there are terrible people occupying the mortgage broker role.  However, let me also point out that there are equal evils in all levels of the mortgage lending pyramid; and that retail lenders are equally culpable in the massive scam that has been the mortgage industry.  But it will be the mortgage brokers that bear this brunt, there is no doubt in my mind.  Good or bad alike - they will be the ones sacrificed to the God of Public Opinion.

Surely, not the large banks and lending institutions who developed and sold the ridiculous products; paying mortgage brokers massive kick-backs to push them on to poorly-informed customers.  Not them, for they have donated too much money and have hired layers of legal counsel that can stymie any chance at a quick and public trial and execution.

No, it will fall in to the laps of brokers, the small business owners, the 3 man mortgage shops.  They will be strung up like the boogeyman (that some surely are) and eliminated from the lending framework. And when that is done the public will rest at ease, and the lenders will get back to making their millions and all will be right with the world...except it won't.


Comments (8)

Keith Stoller
Keith Stoller Tax & Business Solutions - Bakersfield, CA
Just as with any reseller (broker) who functions as a middleman, the threat of having the rug pulled out from underneath them has always existed.  The survivors are the ones that anticipate this and identify a niche for themselves.  The need for alternative providers will always be present, yet the deliver model may need to be rethought to ensure survival.
Oct 15, 2007 06:34 AM
Lewis Poretz
Apex Home Loans - Annapolis, MD
Business Development Manager
This article almost made me vomit.... 15* yrs in the biz for me..... i have the same blog   i hope everyone reads this............
Oct 15, 2007 03:00 PM
Kate Bourland
Marketing with Kate - Redding, CA
Onlilne Marketing Mobile Marketing

This is a very insightful blog posting.  The question that comes to my mind is "how do we as loan officers prepare"  Keith mentions finding a niche.  That would suggest products that are non originator based such as the MMA's.  What other programs/products would make sense?

Oct 15, 2007 07:46 PM
Lewis Poretz
Apex Home Loans - Annapolis, MD
Business Development Manager

Commercial, Reverse, financial such as life insurance....... - expand your products


Prime processors - I am not trying to steal your thunder but I am inserting my blog which addresses the same topic. Please feel free to do the same on mine. Scary times ahead - we need all the input we can get....

are Mortgage Brokers headed to extinction? the most important blog ever!!!


this is becoming truly scary............. 


Oct 16, 2007 12:28 AM
Shawn Nichols
Homelink Real Estate - Red Bluff - Red Bluff, CA

Hello All,

We all see the signs as you say.  But all we can do is hold on and do our best.  I think that what we will see first is that wholesale will not be immediately pulled, but the lenders will start being a lot more selective in whom they take loans from.  I have seen this where we live.  I heard another broker saying that a certain lender had not taken any of their last five submitted loans, but we have had three close with this lender in the last month.  We do our best to offer education and straight facts about loans and the staff at most of our lenders know that a file from my office is a solid, honest file.  If you run a tight ship and are not out for only the most you can charge, but out for what is best for your client, then you will not only survive, but prosper.

 I hope that in a few years we can all say we survived the current mess and still be doing what we do best, helping our clients.


Shawn Nichols

Oct 16, 2007 03:08 AM
Seth Callen
Farmers Insurance - Lawton, OK
Great post.   Scary but great.   Affirms my thinking when I decided to get out of brokering last year.
Oct 16, 2007 03:40 AM
Kris Krajecki
Kris Krajecki - FOX VALLEY MORTGAGE - Huntley, IL - Huntley, IL
Mortgage Broker Huntley, IL

It's too bad that so many brokers are doing so poorly, although, the less brokers there are-the busier it is for me!


Oct 16, 2007 04:44 AM
Katie Marchione
Community First Financial - Scottsdale, AZ
Community First Financial

This is a scary post, but I would like to believe that it's just that - a scare tactic.

Now is the time to strengthen your company, find a niche, worker HARDER...  wholesale brokers are not going to disappear.  We have way too much to offer that typical banks don't.  And there is way too much money to be made on the secondary market.  Yeah things are a little upside down right now - but I have to believe that will correct itself. 

For those who have the time, money and patience to get through these days, I believe you will come out better on the other side.  Have a POSITIVE ATTITUDE! 

Oct 16, 2007 06:35 AM