Many brokers are making the transition to banking. But it takes more than a warehouse line to get started…
The season of change continues for the mortgage industry and, as has been the case for some time now, the mortgage broker is central to the story. Has the Dodd-Frank Act all but eliminated the place of the mortgage broker in the transaction? Or, can the ever-resourceful broker find yet another way to survive the latest wave of regulation?
Depending on whom you ask, the answer to both questions…is “Yes!”
The infamous automobile icon Lee Iacocca was fond of the old saying “lead, follow, or get out of the way.” That is precisely what those seeking success in the new reality of the mortgage industry will do.
Some will lead their organizations down new paths. Some will follow the crowd. Others will either consolidate or move on. Throughout this evolution, we will be asked to learn new terms like “branker”.
Of course, “branker” hasn’t quite made it into traditional dictionaries yet. ! Perhaps a “branker” is a brokerage attempting to behave as a bank. That, however, could be confused with the prohibited concept of table-funding. Let’s not overlook other new terms that will become more common in the coming months and years, such as the “mini-c”, the “delegated” or the “non-delegated.”
Imagine explaining what you do for a living to your neighbor at the next Super Bowl party: “Why, I’m a mini-c!” This will undoubtedly require a bit of additional explanation, and could give more than a few in the industry a complex. So I’ll leave it to the wordsmiths of the world to ponder those terms while I make use of more professional and endearing idiom, “emerging banker”.
Emerging bankers have actually been around for years. An emerging banker is simply a company making the transition, or emerging, from the world of brokerage to the world of mortgage banking.
The emerging banker does not only exist in periods of extreme regulatory or market change. Every business has a life cycle, no matter its surrounding environment. Thus, there will always be emerging bankers, small cap businesses, mid-cap businesses and large cap businesses. Generally, a stagnant business is a dying business.
Therefore, it’s safe to say that we’ll always have bankers “emerging” from the brokerage business.
The recent barrage of regulations has certainly encouraged a significant number of brokers to consider the transition to banking, especially in the past several months. Making that transformation from an operation focused almost solely on loan origination to a firm which also underwrites, documents, closes, funds, settles and sells its loans into the secondary market, however, can be a daunting task.
A good number of emerging bankers do not anticipate this. Some begin the transition with the misconception that they’ll simply need to obtain warehouse lines and begin funding their loans. Reality sets in very quickly in those cases.
For those making the jump from brokerage to bank, the foundation for a success is built on several common sense and critical elements.
1: Get real legal advice
Working with a reputable attorney with expertise in mortgage banking is your best strategy. It’s true that the hometown lawyer may give you the advice you want to hear. However, that attorney won’t pay your fines when the state or federal regulator sanctions your new business for table funding loans you thought were secondary market transactions.
2: Get proper licensing
Determine the qualifications and documentation necessary for a lending license. That license can be a bit more expensive, and you may be required to produce audited financial statements. Do not expect your warehouse banker or correspondent investor to allow you to operate under the de minimus allowance of a particular state when you seek funding for your first loans.
3: Know your audited financials
Some states don’t require audited financials. However, as your business grows, they will be required for delegated underwriting approval, Department of Housing and Urban Development and agency approvals as well as larger warehouse lines. They offer credibility to your business and you as an owner. It’s a great practice to start now even if your state doesn’t require them.
4: Got insurance?
Warehouse bankers will require an emerging banker to have at least $300,000 ofcoverage for both fidelity bond and E&O policies. Some warehouse bankers are even requiring coverage as high as $500,000.
5: Staff up
If you do not have staff and/or experience with preparing closing docs, ordering funds for settlement and reconciling the warehouse advances, expect the correspondent and warehouse lenders to require the use of a reputable third party fulfillment provider that has been vetted in accordance with Consumer Financial Protection Bureau standards. For smaller mortgage bankers, this is a very good alternative to the costly investment in staff and infrastructure required to complete these critical steps. These providers also provide an important compliance component that will minimize your risk of loan repurchases.
6: LOS up
To be a mortgage banker, at any level, you will need a robust LOS. The less expensive, out-of-the-box broker version is simply not suitable for the extended requirements of a banking operation. The banker-appropriate systems have key features such as pricing modules, document prep modules, quality control and anti-fraud features, all of which help maximize revenue and reduce risk of loss and repurchase demands. If you have the broker-friendly system and are a growing company, make the investment in a banking LOS as soon as possible. Part of the reason you’ve chosen to make the transition to banking is growth. It is much easier to convert, for example, one office with five MLOs than it is to implement a system for multiple offices and additional MLOs. Do your homework and compare features, benefits, costs, upgrades and references from at least two or three LOS companies.
7: Get compliant
Make sure you have a bona fide quality control program and documented procedures within your company. If the policy states that you physically audit 20% of the files then make sure it is done and that you’ve retained documentation to validate the audit process. If you’re an emerging banker, designate a compliance officer who understands the applicable regulations and statutes such as Home Mortgage Disclosure Act, Fair Lending, Anti Money Laundering and Dodd Frank Act. Your compliance officer should have the autonomy to police, communicate, and enforce the rules. Most companies originating over $10 million (monthly) have internal compliance officers. Both warehouse lenders and correspondents view this as a critical part of your business and want to see that you take it seriously.
8: Get two investors
Get approved by at least two investors (correspondents) which will buy your loans. Understand their terms and criteria for both delegated and non-delegated underwriting. Build a relationship with them. The correspondent account executives can be a great resource during your transition from broker to emerging banker.
9: Get two warehouse lines
Apply for and maintain at least two warehouse lines. If you originate over $20 million per month then you may consider having three warehouse lines. Structure the line so that it gets used. Excess capacity can result in over-leverage and a violation of warehouse covenants. It’s also a waste of capital for the warehouse lender. Consult an experienced and reputable mortgage banking attorney if your warehouse lender requires all (or at least a certain percentage of) loans be sold to its correspondent channel or its correspondent affiliate. Also, discuss with your attorney if there is an interest rate and/or transaction fee difference based on where the loan is going to be sold, or if the warehouse lender’s correspondent affiliate is performing most of the steps in the loan process: underwriting, doc prep, and post close. Similarly, if the warehouse lender is telling you the loans will be bought off the line in a “few” days, be wary.
You will want to take steps to ensure that your company is not table-funding. Expect your warehouse lender to conduct a very thorough due diligence process with all aspects of the company and its principals.
All of these steps require careful planning and time. Those that embark on a “flip the switch” strategy will make mistakes that could prove very costly. I spoke with one owner recently who said “if we would have done it the right way, we would not have made mistakes that cost us $12,000 in revenue.”
The mortgage brokerage industry is a viable, sustainable and credible business model. The mortgage banking industry is equally credible, sustainable and viable.
With annual originations topping $1 trillion, both can prosper.