Back in January 2009, a blogger calling himself "Mr. Mortgage" wrote an online column with the startling headline that began with the words: "The End of Large-Bank Wholesale Lending." * What prompted Mr. Mortgage's hysterics was the report that JPMorgan Chase & Co., New York, was shutting down its wholesale mortgage lending group, which, in turn, had followed news that Credit Suisse (USA) Inc., New York, had also shut down its wholesale division. * The following year, Bank of America, Charlotte, North Carolina, exited the wholesale lending channel. * To paraphrase Caesar "Rico" Bandello, Edward G. Robinson's character in the 1931 movie Little Caesar, Mother of mercy! Was this the end of wholesale? * Alas, it was the end of Rico Bandello, but not, it appears, of wholesale lending. * A handful of big banks did exit the wholesale mortgage business, but that only cleared the way for scrappy newcomers to fill the void. It was a test of survival for the entrepreneurial firms in those heart-of-recession years. But by 2011, suddenly wholesale lending was hot again and the little guys had become mid-tier players with a leg up on a second wave of newcomers to the market. * On solid ground, the mid-tier wholesale mortgage lenders are laying the groundwork for expansion. In July 2011, 360 Mortgage Group LLC, Austin, Texas, brought in industry veteran Al Crisanty as vice president of national wholesale production. His job will be to expand the company's operations.
The competition isn't sitting still, either. This past August, Carrington Mortgage Services LLC, a Santa Ana, California-based mortgage lender and servicer, acquired specific assets of Irvine, California-based American Home Equity Corporation, which will lay the foundation for launching Carrington's wholesale origination channel.
"Compared to two to three years ago, the appetite for warehouse providers has opened up in the wholesale space," observes Steve Patton, executive vice president at Carrington Mortgage Services. "You are seeing capital flowing into the wholesale space and newer companies enter the market."
It's all a far cry from the dark days of 2007 and 2008.
Swimming into storm waters
One of the first mortgage industry veterans to realize there was going to be new opportunity in the wholesale side of the business was Mark Greco, who for 15 years had run a mortgage brokerage firm in his hometown of Austin called Echelon Mortgage Inc.
The subprime mortgage crisis erupted in the summer of 2007, which was followed by the collapse of the financial markets in 2008. It was in the latter year, when the financial world as we knew it began to melt down, that Greco cranked up a new company called 360 Mortgage Group that would solely engage in wholesale lending.
Echelon, as a broker shop, originated loans directly with borrowers, and this kind of business thrived during the bubble years when mortgages just could not be written fast enough. However, when the housing bubble deflated, it was tougher to underwrite mortgages and the classic, independent mortgage broker business went into severe decline.
Yet, it didn't disappear completely. Nouveau and fringe players went away, leaving behind a core group of veteran, knowledgeable mortgage brokers, albeit in smaller firms, who are still out there today writing loans.
Echelon survived 2007, but there was a dearth of financing available for those independent brokers who were also still in business. When some of Greco's associates in the brokerage business asked Echelon where to turn for capital, as Greco recalls, "We had capacity, so we started dabbling in the wholesale business. The more we were in it, the more we liked it."
Greco liked the new business so much that he closed Echelon and rolled some of his old employees into a new company called 360 Mortgage, which eschewed retail broker operations.
"There was a vacuum in the industry," Greco says about the timing of his new venture. "In late 2008 to early 2009, there were still a ton a of mortgage brokers doing a ton of business, but underwriting times, which were normally 48 hours, turned into 30 to 35 days. Thirty days became standard in the industry. We could do it in 20 days, so we could provide a better turnaround time and as long as we were underwriting for quality, we were in good shape."
There was a hitch to it all. Independent wholesale mortgage lenders don't self-fund, but rely on warehouse lenders to provide what is generally short-term financing.
Surviving the warehouse-line shortage
Back in 2007 and 2008, there were no funds available, observes 360 Mortgage's Crisanty "You didn't have an outlet, you couldn't get warehouse lines. Everybody was scrutinizing every single loan. Everyone was afraid loans would not be purchased by investors," he says.
And Andrew Weissmalik, 360 Mortgage's chief operating officer and an early hire of Greco, adds, "Getting funding from a warehouse was very difficult--it made a 90-day process turn into a 12-rnonth process."
It was an uphill battle for 360 Mortgage to secure warehouse-line commitments, Greco remembers. "At the time we were using a small, regional bank. It was the only line we could get. We had less than two years of corporate history and although we were one of its biggest clients, we kept begging for more capacity. They wouldn't give it."
So 360 Mortgage had to run faster. "We were turning our warehouse lines on an average of 3.5 times a month, which was huge at the time," Greco says.
"We had capacity issues in 2008 and 2009, but since then we have been able to secure more than ample warehouse lines because of our performance," he says.
The big banks exited the wholesale business, partly because they were enduring a great deal of scrutiny and expense from the federal government and other parties regarding repurchase demands and defaults. When fingers began pointing and people started looking for someone to call the bad guy, those fingers invariably were aimed at the lowly mortgage broker.
"The mortgage broker was set up as the fall guy," says Carrington's Patton. "There were some bad guys out there, but the [brokers] that remained in the business were the cream of the crop because they knew the mortgage broker...