Jim Tew is on his way to a really nice year that will have his team post numbers more than double those of a year ago.
Tew is senior vice president of the mortgage division of Fifth Third Bank in Tennessee. In the past year, he has more than doubled his staff — he won’t say just how many people now work for him because they’re “being solicited like crazy” by competitors — and boosted loan volume by 140 percent.
A massive refinancing wave and government incentives to entice first-time homebuyers have played a big role in that growth. But so has the fact that Tew’s employer is a large bank than can fund its own loans and has the perceived safety that comes with a brick-and-mortar branch network.
That safety wasn’t top of mind during this decade’s housing boom, which attracted thousands of new mortgage brokers to the market. They were the financial foot soldiers in a war on the ideas that renting an apartment before buying a house was prudent and that the biggest transactions in people’s lives needed thorough documentation.
For a good number of years, banks and other wholesale lenders provided them with the ammunition to carry out their mission. By the summer of 2007, the number of licensed originators in Tennessee peaked at 17,000 and the number of mortgage companies clocked in at 1,577.
Less than 30 months later, those numbers have been sliced in half by a vicious combination of plummeting demand, suddenly risk-averse lenders burned by no-documentation loans gone sour and other lenders who have pulled out of the wholesale market. Gone are 500 companies and more than 9,000 originators — and most people in the industry think those numbers will get worse in the coming months.
“The herd will be thinned again,” said Chris Tabscott, president of Titan Home Loans, a brokerage based on Second Avenue North. “The last group will be shaken out come January 1.”
That’s because 2010 will bring with it another set of new regulations on disclosures and Truth in Lending Act requirements that lenders say will slow down the process. They will join other new rules — including one that limited the fees lenders can collect up front — that went into effect in July as well as tighter licensing requirements that require originators to submit to background checks and fingerprints and follow a more rigorous continuing-education program.
Combined with the drop in demand, these changes are overhauling the economics of the mortgage broker model. Demand is down and costs are up. That’s never a good combination, but it’s especially painful for a business model like a broker’s that, while it doesn’t require a lot of capital, operates on thin margins.
What is working today is size. The large lenders with the tried-and-tested infrastructure to serve millions of thousands of current and potential homeowners are cleaning up. The nation’s top five mortgage lenders — in the second quarter, that was Wells Fargo, Bank of America, JPMorgan, Citigroup and Residential Capital, a division of GMAC — are on track to add 8 percentage points of market share this year. That will equate to more than $200 billion in loans.
Like Tew’s team at Fifth Third, these big companies are getting bigger in part by hiring a good chunk of the talent that has flowed from brokers. And consumers, Tew said, “are looking for a safe, sound lender they can spend some time with.”
‘We need some of our credibility back’
“Some of those people we needed to lose,” said Sharon Bosworth, president of the Tennessee Mortgage Bankers Association, of the brokers who have quit the business. “They not only hurt themselves, they hurt all of us. It’s survival of the fittest.”
Like so many busts, the mortgage shakeout has created the platform for a cleaner and healthier marketplace to emerge in its place, one that has a healthy dose of new rules and regulations as well as different expectations from its participants.
“Before, a broker might work with 10 to 15 lenders and send them one or two loans a month,” said Tew, whose bank also plays in the wholesale lending market. “Now, the number of loans needs to be much higher.”
Tabscott said his firm, which employs a half dozen originators and books about 20 loans worth between $4 million and $5 million in loans per month, has been able to elevate its standing with its wholesalers by staying in the fight and producing consistently. Titan works with SunTrust, Franklin American Mortgage, Flagstar, Guaranty Trust and Wells Fargo.
“As the market consolidated, we became one of the few brokers still standing,” he said. “We’ve had a lot more people from our lenders stopping by the office.”
That’s easier for wholesale lenders to do these days since they have fewer relationships to maintain. But is there a chance the market shakeout goes far enough to hurt consumers?
Asked about the potential for anti-competitive behavior in a market that, despite still having almost 900 active participants, is seeing players check out on a daily basis, Natalie Townsend of the Tennessee Department of Financial Institutions said state officials don’t have a floor in mind for the number of lenders they want to see active in Tennessee.
“There’s not a good way to tell if it ultimately will get to that point,” she said. “We’ll address that when we get there.”
But several lenders we talked to said the market’s pendulum has swung too far and that federal regulations and programs are hurting their ability to meet market demand. Tabscott said a self-employed borrower “who has scratched and clawed his way to a good credit history over the course of 20 years” and has a large down payment now has a much tougher time getting a loan than a young couple taking advantage of the government programs spurring first-time home purchases.
Compared to such situations, Tabscott said the hassles of handling the new rules and restrictions are relatively minor. The Mortgage Bankers Association’s Bosworth also is sanguine much of the greater oversight, saying she’s glad to see the extra diligence.
“We need some of our credibility back,” she said.
Those in the industry are unanimous in saying that, despite the reputational black eye they have suffered, brokers still have a role in the mortgage market and that the banking system’s larger players will come back to the broker model over time. In essence, brokerage firms provide free employees to lenders looking to deploy capital, especially in areas where they don’t have an effective on-the-ground presence.
Still, success in the future will look different. With the rising barriers to entry, jumping onto the next big market wave won’t be as easy and some firms may be “too small to succeed” in a more regulated market. Firms that expect to thrive will have to focus more than ever on sweating the small stuff when it comes to regulation and running a tight ship while also getting right the big idea of building a solid reputation and valuable relationships with national funding giants.
“Nobody knows how the dust will settle. When there’s uncertainty, there will be fear,” he said. “But there will still be banks that want to participate in 100 percent of the market [by turning to brokers]. Capitalism will take care of that.”
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