Blown Mortgage

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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 bolstering 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.

Last 3 posts by Morgan

• Gaming Home Values and Their Consequences - January 7th, 2009
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