Future of Loan Brokers

by Jim the Realtor | Oct 2, 2009 | Mortgage News | 10 comments

from Paul M., at NMN:

The business of brokering residential loans has enjoyed a good run — about 25 years by most measurements — but now there are increasing signs that not only are these third-party salesman facing a bleak future, but that they have no future at all.

Recently, David Olson of Wholesale Access made headlines in the industry press when he predicted that by yearend there would be just 15,000 brokerage firms in existence. Mr. Olson, who has made a good living the past two decades studying brokers, cites a number of reasons: restrictions on yield-spread premium payments, new national registration requirements and licensing costs, and a general lack of interest on the largest remaining wholesalers in growing their broker channels. (A few mortgage insurance firms have said they either won’t accept broker loans or put bans on condominium mortgages sourced through them.)

“Chase?” asked Mr. Olson. “They don’t like brokers and are out that channel. Bank of America and Wells are seeing their TPO (third-party origination) volumes going down, down, down.” He added, “Everyone is writing brokers off.”

Three years ago there were 54,000 brokerage firms in existence, which means if Mr. Olson’s prediction comes true, the peak-to-trough decline translates into 72% of the industry going bust over three years, not a pretty picture. Keep in mind, though, that many brokerage firms are small “mom and pops” that employed less than five people. Some were sole proprietor operations.

Every month or so Wholesale Access would hear from 1,000 brokers, picking their brains about the state of the market and reselling that research to some of the largest wholesalers, as well as Fannie Mae and Freddie Mac. But today, Mr. Olson says he’s talking to just a handful of brokers each month and many are “looking for something to do.” Some he said are selling car insurance on the side or doing loss mitigation work.

Yet, Mr. Olson sees a ray of hope in the industry’s future. The chief reason is costs. He and many other mortgage veterans know that it can get expensive keeping full-time loan officers on their books, especially when origination volumes begin to swoon. “Brokering is a form of outsourcing,” he said. “It has to be viewed that way.”

In other words, if a loan doesn’t close, a broker doesn’t get paid by the wholesaler. And because a broker is really just an outsourced employee, it costs the wholesaler nothing in terms of fixed salary costs. Banks and thrifts have to maintain retail branches — another fixed cost.

As for how long it will take the brokerage sector to revive, Mr. Olson is uncertain. There have been scattered reports of regional banks launching small, targeted wholesale divisions, a positive sign for the industry. And recently, Michael Ashley, chief business strategist at Lend America, Melville, N.Y., started to lay the groundwork for a new wholesale channel.

According to Mr. Ashley, there “are still plenty of brokers around that would want to do business if they had a source [of funding].” He said he believes the declining numbers in the Wholesale Access report reflect a “survival of the fittest” dynamic among brokers. In many cases he believes those remaining “know how to responsibly and ethically originate a loan.”

In other words, perhaps all the sector’s “bad actors” have left the building and only the cream of the crop are left. We shall see.