WHO'S WHO IN WHOLESALE
Wholesale mortgage banking is approaching adolescence and with minimal fanfare. So little, in fact, that our company, Asset Backed Capital Research, Inc. (ABCR) decided to create a monthly journal to chronicle the important developments and trends occurring within this somewhat neglected but booming sector of mortgage finance.
Wholesale mortgage banking, nonetheless, deserves recognition and will likely be among the few sectors of the mortgage market to flourish in the years ahead. The reasons for this are due to the new economics of mortgage banking. Mortgage Banking has reported extensively on the reasons behind this metamorphosis, so we will avoid a protracted discussion of the seemingly intractable forces now at work. Suffice it to say that industry segmentation, combined with cost pressures and the realization that the economies of scale in servicing, and the tax benefits derived from purchasing servicing, have altered the cost curve, thereby making wholesaling more profitable. At the same time, the old network of financial intermediaries is breaking down and being replaced by a new, lower cost structure in the primary market.
In this examination of the world of wholesaling, we will start with a few definitions so that we are in accord regarding terminology. Next, we will explore the rationale for this newest form of mortgage banking, discuss the various types of programs, and study the market's phenomenal growth.
One of the major mortgage banking developments of the 1980s was the birth and growth of wholesale, or correspondent, mortgage banking. Not long ago, SMR Research, Budd Lake, New Jersey, aptly defined wholesale/correspondent mortgage banking as "a purchase, placement or referral transaction in which there is no direct contact with the borrower."
Wholesaling began in response to the need for alternative forms of gathering mortgages. New methods of generating business were made necessary by the stiff competition for and the high cost of direct mortgage originations. Innovative origination methods were deemed necessary in order to produce mortgage loans at the lowest possible cost, while simultaneously increasing revenue and income.
To accomplish this, mortgage lenders established programs to purchase loans from other originators. The programs borrow much of their structure from the models established by Fannie Mae and Freddie Mac, as well as from the private-sector conduits, such as Residential Funding Corporation, Bloomington, Minnesota, and Sears Mortgage Corporation, Riverwoods, Illinois.
Types of programs
There are four types of wholesale programs: broker, correspondent, bulk and servicing. Broker programs employ mortgage brokers to originate the mortgages. These originators take the applications and process the loans. But the loans are underwritten, closed and funded by the wholesaler, thus the wholesaler assumes the liability. A correspondent program differs from a broker program in that the originators are financial institutions, such as commercial banks, thrifts and mortgage companies. Under both broker and correspondent programs, loans are purchased on a loan-by-loan basis. Loans can also be purchased on a bulk basis in a correspondent program.
In a bulk-purchase program, the wholesaler buys a group or portfolio of closed mortgage loans. Bulk purchases are made on either a servicing-released or servicing-retained basis.
The final type of wholesale program is for the purchase of servicing. In a servicing transaction, the wholesaler purchases only the rights to service the loan, not the mortgage itself. (The wholesaler administers the borrower's monthly remittance and assumes complete responsibility for timely payment to the ultimate holder or investor of the loan or security.)
Countrywide Funding Corporation, Pasadena, California, for example, has both broker and correspondent programs. Countrywide refers to its broker program as its "wholesale" operation or division. By comparison, The Huntington Mortgage Company, Columbus, Ohio has only a correspondent program. Huntington does not deal with licensed mortgage brokers. The type of originator that a wholesaler does business with is the distinguishing characteristic between a broker and a correspondent program. Dollar Mortgage Corporation, LaMesa, California; Diamond Mortgage Corporation, Charlotte, North Carolina; and IMCO Realty Services, Santa Rosa, California, are examples of companies that deal almost exclusively with brokers. Who...