A balancing act.

Author:Schneider, Howard
Position:Mortgage companies combine wholesale lending with retail lending - Cover Story

Wholesale lending's stunning growth has allowed mortgage companies to rapidly increase their volume and even restructure servicing portfolios. For instance, Riverside, California's Directors Mortgage Loan Corporation began wholesale lending a little more than two years ago. Today it accounts for half of the firm's production.

Source One Mortgage Services Corporation, Farmington Hills, Michigan, got into wholesale lending in 1984. "Our size and appetite means it makes sense to do both," explains CEO Jim Conrad. Last year a little more than half of Source One's $4.2 billion in volume was originated through wholesale. "I don't believe we could grow our production quick enough with just retail," Conrad says.

Yet, wholesale lending has not replaced traditional retail activities. Many large lenders see the two origination strategies as augmenting each other. "We can run both wholesale and retail businesses successfully," says Peter Wissinger, senior vice president at Norwest Mortgage, Inc. in Des Moines, Iowa. Wissinger heads the retail division, which accounted for more than half of Norwest's $13.2 billion in 1991 originations.

After the collapse of the 1986 to 1987 refi boom, mortgage lenders discovered that having people on staff who could produce didn't guarantee that a company would flourish. In fact, volatile interest rates can make yesterday's top office tomorrow's expense headache.

Management now is paramount, because having a strategy and then implementing it is the linchpin to success in today's mortgage business. Although traditional selling skills and contacts are as important as ever, businesses no longer can grow simply by hiring loan reps with natural sales talent and providing them cursory training.

The emergence of new types of loans has taken some of the simplicity out of mortgage lending. Demands made by the secondary markets and regulatory bodies, as well as the need for investment in new technologies, have increased the cost of doing business. In addition, the industry has become more competitive and profit margins have shrunk.

Today, there is not one approach - rather, there are choices made according to a company's existing financial and operational structure. Strategies differ between companies, depending on, among other factors, a company's access to capital and its management's willingness to set its own course.

Portfolio restructuring

Colonial Mortgage Company in Montgomery, Alabama has moved from being primarily a retail lender to a wholesale firm during the past few years, says Colonial President Ronnie J. Wynn. One reason for the switch was because management "wanted to change the servicing portfolio mix from Ginnie Mae pools to Fannie Mae conventional servicing."

The continuing liability for government loans plus the favorable accounting treatment of loans acquired through wholesale made Colonial's move from retail FHA and VA originations to wholesale conventional purchases an attractive one, Wynn explains.

Many larger companies view wholesale lending more as a means of increasing total volume rather than as an attempt to capture a certain type of business. However, that can cause problems when retail originators perceive wholesale prices - including those offered by their own firm - as being more attractive than what they can provide.

"Production is production to us," explains Richard Duncan, executive vice president at Columbia, South Carolina's Fleet Real Estate Funding Corporation. "It's important for the retail people to understand that," he adds, noting that a recent company-wide meeting brought all of Fleet's production units together.

Duncan told retail originators that wholesale prices might be better than retail rates because an originator can pass on to a borrower a portion of Fleet's servicing-released premium. But, he adds, the wholesale division is not competing against the retail staff, because it is seeking loans that otherwise would go to another wholesale lender.

Almost $8 billion of Fleet's $11.4 billion in 1991 volume came from wholesale lending. However, management hopes to bring retail production up to half the total origination volume. Duncan says that "Fleet is fairly conservative. We don't want to put all our eggs in one basket."

Staying balanced

"Growing a retail network fast is hard unless you take on a lot of risk," Duncan adds. Steps to building a retail network include finding the right market area, staff and location. You might end up on the wrong side of town, he explains, if you make a poor location decision for your branch.

Duncan says a lender must get the company's name established. "If you're really lucky, you might do $25 [million] to $40 million the first year," depending on the resources committed to the new office.

"You can grow wholesale faster," Duncan adds, because a lender can "establish a relationship with a correspondent who has already [gotten] established in the market." Fleet requires that its correspondents have a net worth of at least $500,000, have HUD or agency approval, have at least two years' experience and "enough volume to stay current on our procedures," according to...

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