Opinion: The evolution of the independent mortgage bank

It's too early to feel sorry for the IMB. Adversity is the engine of innovation for these institutions.

These current mortgage markets are what make it challenging for independent mortgage banks (IMBs). For many of these transaction-oriented, monoline mortgage lenders, it’s always a question of feast or famine. For most of this century, they’ve come out on the winning side. Today, many might feel sorry for the IMB. 

This is true, even though we all know there are very few winners when the industry slows down as quickly and significantly as it has over the past 24 months. Mortgage loan volume in the second quarter of 2023 was down 56% from the same period last year, according to ATTOM. It’s down 70% from its peak in 2020, a 20-year low, the company said.

Interest rates have risen from a low of less than 3% in 2012 to over 7% today, meaning that 99% – according to Goldman Sachs – have a lower rate and would not benefit from a refinance.

So, one could assume that the independents, many of which have feasted on refinance business that is no longer available, would have dried up and blown away by now. That assumption would be incorrect.

While these lenders have suffered as much as everyone else during this downturn, any rumors of their death have been exaggerated. 

In our work with all kinds of lenders, we have found that independents operate under several business models. IMBs operating under one of those models did extremely well during the refi booms, but are faring poorly now.

But there are two other models in use today, and those lenders are doing much better. One of these groups could emerge from this downturn as industry leaders.

The fate of the specialist when the market shifts

The independent mortgage banks most of us think of when someone mentions IMBs originated as a result of the Savings and Loan Crisis of the 1980s. 

During this crisis, many savings and loans failed, and the federal government stepped in to bail out the industry. As a result, many savings and loans were consolidated into larger institutions. This left a void in the mortgage lending market, which was filled by IMBs.

IMBs are non-depository institutions that specialize in originating and servicing mortgages. They are typically not affiliated with any other financial institution, and they vary greatly on the number of storefronts and branches they have. IMBs are often more flexible than traditional banks, and they are more likely to lend to borrowers with less-than-perfect credit due to their strategy of having multiple investor outlets.

During the extended period of artificially low interest rates, these institutions became the leaders of the online, streamlined rate-and-term refinance transaction. In addition, they were leaders in originating FHA, VA and USDA loans. As a result, the IMB sector saw significant growth, but that specialization would prove to be a risk embedded in their business model.

In 2008, IMBs originated less than 20% of conventional mortgages. By 2021, according to the Mortgage Bankers Association, they were originating over 60%. 

However, when rates rose and refinance mortgages fell to a historically low share of all mortgage originations, the writing was on the wall for many of the lenders who catered to consumers instead of the real estate industry.

Since IMBs tend to be more flexible than traditional banks, this gives them an edge in the competitive mortgage lending market if they are willing to evolve beyond the refinance business.

The first stage is becoming a catch-and-release shop

When it became clear that rising rates would destroy the refinance business that had made these firms so successful, some leaders in this sector evolved their businesses to originate assets for other investors.

The game was to find out what types of loan products were in demand by various investors and quickly ramp up a system to originate those loans and sell them off.

It was still transactional revenue, but they weren’t originating loans to create their own pools of refinance loans for securitization anymore. Instead, they were filling a need for other investors who still had liquidity.

Some are still doing this today and doing quite well. They are like super-broker shops that use their own third-party origination networks like a mortgage-bank-in-a box for others who have an appetite and are willing to create their own mortgage-backed assets.

There is yet another stage to the IMB’s evolution and it created a new kind of originator that may well emerge even stronger after the downturn.

The second stage is becoming an emerging market leader

The evolutionary step from catch-and-release mortgage banking turns the IMB into a new kind of institution that originates assets for its own benefit and puts them on its balance sheet as assets, consisting of their origination pipeline and their mortgage servicing rights. 

Some of these firms are backed by venture capital or hedge fund assets and are changing the game in the sector.

Once they have these assets, they can create yield to attract investors. As they continue to evolve, they may appear as if they are not necessarily in the mortgage business and look more like asset management companies.

We have a number of examples in the market today. If you look at NewRez and Mr. Cooper, you’ll see REIT/private equity-backed institutions that are originating assets for their own financial vehicles and attracting outside investment in the process.

Firms like these first came to our attention because they were working to mitigate the risk of developing overcomplicated tech stacks. Because they originate many different types of products, tech sprawl is a risk that could result in high downstream maintenance costs and untenable total technology cost of ownership.

It makes sense for these organizations to do as much of their work as they can on a single tech stack, whether they are originating traditional mortgages, reverse mortgages, fixed seconds, HELOCs, Non-QM or Jumbo loans. And these firms are likely to do it all; anything that will attract yield and subsequently be attractive to investors in the market.

It may have been necessity that drove these institutions to evolve, but breaking free of the refinance transaction and mastering the origination of a wide range of mortgage products has positioned these lenders very well to be top mortgage competitors when the market turns.

In compiling nationwide third-party originator networks, many have the internal systems both for originating a wide range of products and managing those assets for a good return, and the capital to choose the right origination platforms to support their business.

It appears that this might be too early to feel sorry for the IMB. As they say, adversity is the engine of innovation and it’s likely that smart lenders will create similar strategies so they can compete when the market returns.

Joe Camerieri is Executive Vice President of Sales and Strategy at Mortgage Cadence. 

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Joe Camerieri at [email protected]

To contact the editor responsible for this story:
Tracey Velt at [email protected]

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