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Wholesale competition: how important is it to be the preferred buyer for a correspondent? It may be more critical than you think, a new survey shows.


How important is it to be the preferred buyer for a correspondent? It may be more critical than you think, a new survey shows.

Correspondents will sell twice the volume to the wholesaler designated as their primary relationship than they will to the number two firm. That is what a just-completed survey on wholesaler-correspondent relationships revealed.

If you are not the primary wholesale outlet, the opportunity cost of not being the first choice of a correspondent is greater than you think.

The selling behavior of an array of correspondents reveals some interesting patterns. The numbers are compelling. The mortgage wholesaler chosen as the preferred buyer of loans is two and a half times more likely to receive more than 25 percent of a correspondent's product than is the seller's second choice for a wholesale outlet.

Once a group of correspondents are selected that complement the wholesaler's production strategy (byproduct, geography, pricing structure, growth and quality goals), the primary marketing objective becomes increasing the share of product sold by each firm. What exactly is involved in pursuing such an objective?

Characteristics of correspondents

The first factor to understand is how your correspondents behave in the marketplace.

Correspondents are usually small shops. But it is helpful to know how small. The figures developed in the Wholesaler Quantitative Survey show distribution of origination volume at the end of 1989. The survey results are based on an analysis of the responses prepared by SSP/RES Research, Washington, D.C. These results clearly suggest that the wholesaler is supporting a small originator in dealing with the typical correspondent. Almost 73 percent originated $100 million or less in 1989. According to Mortech 90, another study performed by SSP/RES Research, 69.8 percent of mortgage banking firms and thrifts originate $100 million or less.

From this 100 million or less group, on average, a wholesaler would stand to get a maximum of $58 million in production, if a typical correspondent were to sell all its production to a single firm. However, the SSP/RES survey shows there is less than a 50 percent chance (46.5 percent) that a correspondent will sell all its production to the secondary market. Even the primary respondent for the typical correspondent surveyed stands less than a 50-50 chance (45.5 percent) of buying as much as 50 percent of that originator's product. That amounts to having one chance in five of buying half of a correspondent's current production. If the wholesaler is in a secondary position as a favored wholesale outlet, the probability falls to about one chance in ten for getting half of a seller's production. Carried further, the wholesaler in the third position has about two chances in a hundred of getting at the lot of a correspondent's current production.

Increasing business

One way of meeting business objectives would be simply to line up as many correspondents as possible. For every 50 correspondents signed up you might bring in $58 million in production. But, what about the competition in the wholesale business?

The survey found that 47.3 percent of correspondents have relationships with two to five wholesalers. More than one-third of correspondents responding to the survey--36.3 percent to be exact--do business with six to ten of the firms competing as wholesalers. The principal objective for the wholesaler is to reduce the correspondent's number of active wholesaler relationships to as close to one as the market and economics allow.

Generally, it is more efficient to increase volume from existing customers than it is to build new relationships. The SSP/RES Mortech 90 study indicates that more than half of the firms in the mortgage industry currently sell no loans to wholesalers. Therefore, finding potential sellers that meet your performance standards is a challenge in and of itself. Once you have located them, turning new accounts into worthwhile relationships becomes a formidable marketing task. The Wholesaler Quantitative Survey shows that correspondents are likely to be very satisfied (34.7 percent) or satisfied (41.1 percent) with the overall performance of their primary wholesale relationship. Therefore, getting correspondents to switch allegiance takes understanding, organization and good execution.

Capturing market share

Wholesalers are confronted with the tough task of trying to isolate good correspondents and woo them from current relationships that are typically not unsatisfactory. Capturing the hearts and minds of new correspondents requires execution of business fundamentals in the most single-minded and dedicated way.

For those in the wholesale business, the first objective should be to retain, and then, improve existing relationships. It is as important to understand why correspondents abandon a business relationship with a wholesaler as it is to open a new account. The three categories of reasons revealed in the survey for diminished wholesaler relationships are as follows: pricing (36.9 percent), underwriting (25.6 percent) and customer service (15.9 percent).


A wholesaler's pricing performance is viewed by correspondents from two perspectives--competitiveness and consistency. Proper pricing depends on being close to market, but, as important to survey respondents was the wholesaler's maintaining that competitive price. In fact, larger correspondents indicated they regard consistency in pricing as more important to them (50.5 percent) than pricing competitiveness alone (38.7 percent).

Correspondents need to receive clear and consistent pricing policy information. As a trading partner, a correspondent should have a current understanding of the wholesaler's pricing policies (in addition to price quotes). By using all available media with correspondents, a wholesaler can hope that sufficient display and repetition of pricing information will eliminate ambiguities. Printed pricing information (pricing manuals), electronic display (electronic bulletin board pricing information), and account executive consulting can be used in combination to help ensure that correspondents understand current pricing details and strategies. Repetition is often a precursor to knowledge.

Junk fees emerged in the survey as an issue that needs attention. Complicated pricing that includes a host of miscellaneous charges is a put-off to a significant number of correspondents (9.4 percent). Such yield enhancements are transparent and occasionally force a correspondent to take his business elsewhere. Minimizing the use of junk fees will simplify communication and streamline the administration of a trading relationship.


Among current primary wholesaler relationships, unclear and inconsistent underwriting policies was the factor most likely to cause concern for correspondents. Of all relationship-defining factors, correspondents are likely to be least satisfied with underwriting in their primary relationship, the survey found.

The two major factors that correspondents are least satisfied with in the area of underwriting are consistency and the time it takes for a wholesaler to arrive at an underwriting decision. Note that correspondents were not expressing concerns about the wholesaler's basic underwriting principles, but with the operational and informational issues that surround the underwriting process.

Timeliness in decision-making is the cornerstone to building a lasting business relationship with a correspondent. According to the Wholesaler Quantitative Survey, taking more than two days to return an underwriting decision could wear unnecessarily on relations with a correspondent. In the not-too-distant future, a one-day turnaround may become the industry standard. At minimum, wholesalers should be monitoring regularly elapsed time from underwriting inquiry to the return of a decision.

Organizing the underwriting department to enable it to be responsive to customer operational needs is critical. Technology, adequate to meeting service needs, is available and has been adequately field-tested. Electronic links to credit bureaus, appraisers and the primary market can reduce markedly the time for gathering underwriting data. Actual decision-making can be aided and accelerated through the help of artificial intelligence. Such systems are still in the experimental stage, but wholesalers should monitor their development. The lead time (a minimum of one year) for integrating the underwriting process into an artificial intelligence system has to be factored into your thinking.

The consistency of underwriting decisions is partly an informational issue. Similar to pricing, communicating the principles of underwriting and the reasons any policy changes are made, is critical to correspondent understanding and satisfaction. Manuals, bulletin board updates and account executive briefings are the essential means available to help knit correspondent and wholesaler operations more closely together.

Another key to delivering consistency in underwriting performance is that wholesalers must make certain that everyone involved in the business relationship with a correspondent is coordinated in thought and in action. Everyone on the wholesaler's staff must be singing from the same hymnal, in tune, and on time. All underwriting documentation should be kept current. Staff should be informed, trained and kept up-to-date. Merely circulating memos and documentation is never sufficient to ensure that underwriting principles and guideline changes are adequately communicated.


The fundamental message being stressed in business schools and by management consultants today is that the key to remaining competitive rests on your ability to provide and maintain product and service quality. After studying thousands of business cases, the Strategic Planning Institute, Cambridge, Massachusetts, concluded that firms perceived to offer superior quality are likely to be twice as profitable (return on investment) as those demonstrating inferior quality. It appears that the perceptions that customers have of the quality of your performance are, in the long run, of equal importance to the substance that underlies quality performance.

The Wholesaler Quantitative Survey asked correspondents about service concerns that were raised by the nature of their relationship with their number one wholesaler. Chart 3, assessing wholesaler service issues, highlights the


Clearly, the primary service issue brought up by correspondents responding to the survey was the difficulty they have in obtaining timely responses to inquiries and to problems raised with the wholesaler's staff. Normally, the primary contact between a correspondent and the wholesaler is through the account executive. In order to improve service levels, it makes sense to assign support staff to each correspondent to field day-to-day inquiries. The account executive is then freed to spend more time marketing. Whenever possible, it appears worthwhile to try to reduce the number of people involved between the receipt of an inquiry and the delivery of an answer.

A wholesaler's complete service package incorporates underwriting, funding, problem resolution, and servicing. Management's responsibility is to measure and maintain the level of service so as to make it superior to the competition. But quality has two aspects--conformance and perception.

Conformance means actually setting up procedures that reduce operating errors and that allow rapid response to changing market needs and conditions. Perceived quality is a concept of relativity--relative to a competitor's performance and relative to the correspondent's expectation of what your performance should be. Managing perceived quality requires surveying your customers about their perceptions and also requires formal monitoring of the service offered by competitors.

The potential rewards of providing superior service are considerable. They include greater correspondent loyalty, increased pricing latitude, lower marketing costs, increased volume from existing customers and improved market position and share. Clearly, large dividends can be reaped from instituting a formal program for improving the quality of service offered to correspondents.

Putting it all together

The plan to become "number one" in the eyes of your correspondent requires a systematic review and updating of all aspects of your service package. That includes how you measure up in the following areas: pricing, servicing, funding, product array, staffing, underwriting and customer support.

The staff member closest to the issues and in the best position to manage the assessment of service quality is the head of correspondent banking. The argument that a correspondent is more than a source of production; it is a separate business--is an argument with merit. Most aspects of the correspondent relationship are tied to the fundamental business of the wholesaler, but the relationship does contain its own unique properties. The product line offered to correspondents may differ from that offered through retail production. Certainly, product pricing is unique. The correspondent has its own set of customer sales and service needs. The competitors the wholesaler faces are unique to that line of business. Even the measures of performance, control and compensation may be specialized and differ from the other sources of production within the firm.

The head of correspondent banking is really the president of a distinct line of business. They need the budget and management authority to make decisions rapidly that benefit that unique segment of the business. The primary connection between wholesale and the rest of the company is through secondary marketing. One way to conceive of this relationship is to think of secondary marketing as the primary buyer of product from the correspondent business. If a correspondent is unhappy with the price or terms offered by marketing, is there a compelling reason why the head of the correspondent program should be barred from selling directly into the secondary market?

The measure of success, ultimately, is the total profitability of this line of business, as well as the entire firm. Some mortgage companies charge back marketing losses to the correspondent business, but do not give that sector credit for marketing profits. Such practices blur the real performance of the wholesale business.

After reviewing the unique management terrain of the wholesale business, one thing becomes clear. The crucial element of an effective management philosophy lies in giving the head of correspondent banking authority over the service mix offered wholesale customers. In a business as competitive as this is, giving the manager closest to the customer ample rein is the most viable route to becoming number one. [Chart 1 to 3 Omitted]

Jeff Lebowitz is president of Strategic Systems Partners, business and marketing consultants to the mortgage industry.
COPYRIGHT 1990 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Lebowitz, Jeff
Publication:Mortgage Banking
Article Type:Cover Story
Date:Aug 1, 1990
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