First Horizon shuts down subprime lending

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First Horizon Home Loans stopped taking subprime loan applications from third party originators (brokers) on Wednesday. From MortgageDaily.com (subscription req’d)

First Horizon Home Loans discontinued accepting nonprime loan applications from brokers, the company’s president of consumer lending told Mortgagedaily.com. The move was made on Wednesday, he said. Profit margins in the wholesale subprime business drove the company out of that business.

One of the things that a lot of people don’t understand is that most of these banks do not make the lion share of their profit from direct lending to customers. Sure, they have some loan officers who will do direct loans, but usually 80% or more of their revenues come from wholesale lending.

If we look at a bank like IndyMac or Accredited, more than 80% of revenues come from the wholesale channel - that is brokers and correspondent sellers delivering loans to the company. It makes sense that this is the case. You can sign up as many brokers as you want to sell your product, but you cannot have an unsustainable amount of retail loan officers working out of vast buildings on your dollar. The economics of it dictate that it is far cheaper/profitable to take the loans in and not have the excess overhead expenses of rent, salaries, benefits, management, etc. to generate those loans.

What a lot of these banks are now realizing (or better said paying for now) though is that the loans generated through the wholesale channel are of far poorer quality. Brokers feel no need to deliver a "good" loan to the bank, because they are never going to see or hear from that person again.

Now banks are shuttering their wholesale channels to protect themselves from poor loan quality, but they are forced with delicate choices because the wholesale channel is where they have made all of their money in the past.