Change is inevitable, and the wholesale lending space is definitely seeing a lot of it lately.
SunTrust Mortgage (STI) startled many mortgage brokers in its network of contacts when it decided to exit broker lending, effective Dec. 31, voting with its feet to escape incoming regulatory burdens and the feeling that the space is no longer worth the risk.
Good news or bad news? It's hard to say, lenders in the space claim. Some see it as a benefit, especially if they belong to companies willing to stay the course and tough it out on the broker lending side.
Howard Hoyt, president of USA Wholesale Lending, sees the exit of larger players such as SunTrust from wholesale broker lending as a potential benefit to his business, which does both wholesale and retail. USA Wholesale Lending is part of Hallmark Home Mortgage out of Fort Wayne, Ind. The unit clearly sees opportunity where larger banks and other lenders are seeing the cost of compliance and risk outweight the benefits.
Back in March, USA Wholesale announced a soft launch of its wholesale program in several states with Hoyt at the wheel.
Howard Hoyt came onboard after developing a three-decade long career establishing his reputation as the "founding father” of wholesale lending company, Union Federal Bank. He joined USA Wholesale from Fairway Independent Mortgage Corp., where he served as a divisional vice president.
He looks at the SunTrusts and Wells Fargos of the world who are leaving wholesale lending as firms leaving a trail of opportunity.
"They have different models than I do as a regional/and national player – a start-up if you will," he said.
Hoyt believes the SunTrusts of the world are looking at incoming regulations like the qualified mortgage rule and changes to compensation models, which come out in January, and saying "the risk isn’t worth the reward.”
"And that’s okay with me," he added. "In my mind, it levels the playing field for guys like me. I don’t have to compete with those larger guys."
For smaller firms dedicated to fostering the relationships and the wholesale model, an exit of larger players can also mean no more competition with large depository institutions that can gain competitive advantages through lowering prices -- a practice supported by their higher streams of revenue.
But SunTrust’s decision, which comes after EverBank (EVER) and numerous others decided to make the move, does send a signal that the market for some is not shifting for the better. Citi (C) in 2012 said it would no longer originate loans through its wholesale broker channels.
"It may put a nervous twitch in the mind of the broker," said Hoyt. Yet, he says, "The guys in the market today who have survived are much better trained and educated. We got rid of a lot of the folks who were not quite as keen in compliance and regulatory issues."
The broker lending exit is occurring as refis dry up, leaving a ton of overhead expense with nowhere to go right now, Hoyt points out amongst the larger players.
This is another factor prompting some of the exits, he believes.
But the broker model is still one Hoyt believes in. A broker can deliver a quality product to the secondary market at a lower cost than one could have had through the larger players' channel, he says.
For now, he's seeing diamonds in the rough, or what may more appropriately be called a larger playground to play on with the biggies making strategic exits.