Murray, Michael
The mortgage industry faces a paradigm shift as warehouse lending dries up, wholesalers shut down and mortgage brokers turn into branches.

“This is an industry-wide problem,” said David Zugheri, co-founder of Envoy Mortgage, Houston. “Warehouse lending is down 90 percent by a number of participants, and the total amount of funding by 75 percent.”

Zugheri said a mortgage banker, once able to receive a $20 million line of capital with $1 million will likely receive nothing now with $5 million.

“We see that [problem] causing a lot of consolidation,” Zugheri said. “The bigger companies will get bigger, and the logical step for the smaller company will be to merge up into one that might make it.”

“We’re definitely seeing the move of branches to larger companies,” said Brian Lynch, president of Advantage Systems, Irvine, Calif. “The old deal of [mortgage] brokers becoming bankers--that is not happening because of this warehouse issue.”

“The mortgage brokers today—they have a hard time functioning,” Zugheri said.

In recent years, mortgage brokers wanted lender variety and shied away from mortgage bankers, including Envoy Mortgage, Zugheri noted, because Envoy preferred to be an exclusive lender for the broker. Now, with longer times for appraisals, underwriting and meeting conditions, brokers are coming to Envoy to speak with them about  options.

“They’re tired of that, and now they’re willing to talk to us--to lose a lot of their independence--just so they can function,” Zugheri said. “We’re having a lot of these conversations on a daily basis. And it’s not a few brokers. No one is immune. We can’t find a mortgage broker out there that is immune to what is happening in regards to HVCC [Home Valuation Code of Conduct] and just the general dynamics of how the wholesalers and aggregators are functioning. The bigger companies are three weeks in underwriting. When you get a purchase contract handed to you and they’re closing in a month, as a mortgage broker, they have a difficult time servicing the real estate agent and borrower given the environment and business framework [they] have to work within.”

“We see that as well,” said Joel Horn, president of Mortgage Spirit, Denver. “There is a heavy [mortgage] broker community out there. A lot of those brokers can no longer survive, operate on their own and can’t move into a banking environment. In lieu of that, being acquired by large organizations provides a branch setting for them. We’ve seen a lot of that over the last 12 months and project that to continue over the next 12 months.”

Horn said mortgage insurers also have different rules for third party originators, which make the business more difficult. “It’s not just the delivery and service that is suffering for the third-party originator or broker, it’s also the availability of products that are starting to be squeezed,” he said.

The new good faith estimate, if enacted by HUD’s new Real Estate Settlement Procedures Act rules, will also look different to the mortgage broker or banker, Horn said. He added that H.R. 1728, the Mortgage Reform and Anti-Predatory Lending Act, is “vague” on yield spread premiums, again supporting the shift from mortgage broker to mortgage banker moving forward.

“That’s a looming threat to the [mortgage] broker environment, and then also to the small-tiered wholesale [lender] providing third-party business,” Horn said.

Many small subprime mortgage brokers also do not have the capacity to become FHA lenders on their own, leaving Fannie Mae and Freddie Mac loans with higher down payments. “They shift to these branch organizations that can provide the FHA umbrella over them so they can survive in this market,” Horn said.

Zugheri said mortgage compliance has gone to a new level that requires more people, technology and a central control, but compliance means nothing without funding.

“There is a move toward central control--the mothership of these companies being more involved in what the branches are doing and assuming responsibility that normally would be handled at the branch level. They’re now being handled at the corporate level,” Zugheri said. “That causes corporate allocation to be even more expensive. They have to pay for all of these services in order to be compliant. It’s a sea change.”