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Wholesale giants.


Mortgage banking's top 10 wholesalers share their insights and expectations about current directions for the business.

Wholesale mortgage banking, correspondent lending, third-party originations, purchased production--call it what you will--this form of mortgage banking has grown dramatically in recent years. Nowhere is it more evident than among the giant mortgage bankers that operate acquisition programs nationwide.

As Table 1 shows, the nation's top 10 wholesalers purchased $40.3 billion in 1990. Aggregate volume for that year was $76 billion for the 80 wholesalers whose activity I tracked. This data comes from the ongoing research into wholesale mortgage banking, which my company, Ohio-based Wholesaling Inc., has tracked since 1985. By comparison, origination activity last year totaled $454 billion, according to HUD data. These same 10 companies collectively purchased $25 billion in 1989, 61.2 percent less. (See "Who's Who in Wholesale," Mortgage Banking, April 1990.)

Although the estimated volume for 1991 for the top wholesalers was essentially unchanged from last year's level, individual corporate volumes changed considerably between 1990 and 1991: five companies increased their purchased production volumes; five shrunk their volumes; one was essentially unchanged. Purchases this year compared to last year rose by $1.4 billion, $2.3 billion and $1.6 billion at Norwest Mortgage, Prudential Home Mortgage and Chemical Mortgage, respectively. However, year-over-year volume declined by $2.7 billion at Marine Midland Mortgage and by $1.2 billion at Fleet Mortgage Group. The former ran into capital problems, while the latter reined in its assignment of trade (AOT) and broker programs to curb volume and its demands. The five other companies held volumes steady.

Nearly as dramatic as the purchased production volume expansion in recent years is the increase in the number of companies engaged in wholesale mortgage banking activities. The past six years have seen the headcount swell from around 12 to 15 to more than 150 companies. The factors behind this growth were examined in an article I co-authored for the August issue of Mortgage Banking. That article isolated seven factors propelling the expansion:

* lower fixed costs; * increasingly favorable accounting

treatment; * increased efficiency in building a

servicing portfolio; * scale economies and the economics

of size; * improved risk management and

quality control standards; * structural changes in the primary


What follows is a series of interviews with the managers of the nation's largest wholesale mortgage banking operations. While several subjects are discussed, the three principal subjects addressed are what these managers like best about purchased production, what they view as the chief challenges for this sector and what they regard as the ranking trends in the business. It was found that what they liked best about wholesaling were:

* lower fixed costs; * greater profitability; * better loan quality; * business relationships; * improved risk management; * greater flexibility to expand or

contract volume; * better quality servicing; * geographic portfolio dispersion;

The respondents noted that the chief challenges in wholesaling were:

* quality control; * managing growth; * constructing well-designed

wholesale programs; * pipeline management; * managing automation; * maintaining excellent customer

service standards.

DOUG MILLER, vice president, Marine Midland Mortgage Corporation, Charlotte, North Carolina Marine Midland Mortgage Corporation's involvement in purchased production began in 1985 when the company purchased $1.7 million. The next year, purchases increased to $319 million. Purchases kept climbing and rose from $773 million in 1987 to $2.9 billion in 1988 and $5.8 billion in 1989. In 1990, wholesale production totaled $4.25 billion. The company's production projection for 1991 is $1.6 billion.

LaMalfa: What do you like best about wholesale as a method of generating product?

Miller: I like working with professional, skilled mortgage bankers who generally have a good understanding of our business. On the retail side, Realtors and contractors may not have this same understanding.

LaMalfa: Do you see wholesale production growing as a percentage of total production?

Miller: It's going to get progressively bigger--the question is: how much bigger? As more and more product comes through this mode, the market becomes more competitive. It seems like a thrift or bank sets up a wholesale operation weekly. I wouldn't be surprised if there are a thousand companies doing wholesale. Look how many companies in California have wholesale operations.

LaMalfa: What volume of activity will Marine Midland Mortgage do next year?

Miller: Our volume has been cut back for a couple reasons, but the primary one is the capital requirement. If we come up with a solution to it, we may return to a strong growth path. Maybe not as large [as] prior levels, but greater than what we were looking at in 1991. Absent a solution, we're probably looking at 1992 levels being equal to this year. The capital constraints have forced us to only purchase whole loans, thereby eliminating our assignment of trade program and current servicing acquisitions.

RICHARD DUNCAN, executive vice president, Fleet Mortgage Group, Columbia, South Carolina In 1981, Fleet Mortgage Corporation, the Milwaukee subsidiary of Fleet Mortgage Group, started a correspondent program. Volume was relatively modest in that program until 1984, but by 1986, Fleet had expanded the program to well in excess of $1 billion in annual production. In 1987, the company began a correspondent program in its Fleet Real Estate Funding subsidiary and by 1988, the annual production was in excess of $1 billion for that unit as well. Since 1988, both programs have experienced dramatic increases in volume, resulting in combined volumes in 1990 of roughly $9 billion. Both Fleet Mortgage and Fleet Funding initially started with government purchase programs specializing in loan-by-loan commitments. As markets changed, the company expanded with lock-in programs for conventional products and a mandatory delivery program. Recently, it undertook the expansion into the jumbo product line. From time to time, Fleet has participated in assignment of trade and co-issuance transactions, but recently it has elected to emphasize the lock-in and mandatory programs for government, conforming and jumbos.

LaMalfa: What does Fleet like best about correspondent lending as a method of production?

Duncan: As a larger servicer of mortgages, we have a need to continuously expand our servicing portfolio. The correspondent lending function enables us to acquire large volumes of business without having to make major capital investments in bricks and mortar. We are able to acquire a geographically diverse servicing portfolio that insulates Fleet Mortgage Group against isolated economic downturns on a regional basis. We have stayed with the basic programs and enhancements when the market has demonstrated a sufficient demand to ensure the success of the program on a long-term basis.

LaMalfa: Do you expect correspondent production to continue to grow?

Duncan: Yes. The crisis in the S&L industry has put into play a significant amount of mortgage production. Mortgage bankers and commercial banks are increasing their market share and the servicing capacity is not necessarily available in all of these companies. The economics of the wholesale transaction continues to encourage lenders both large and small to sell a portion of their production servicing-released.

LaMalfa: Do you see any new modes of production on the horizon?

Duncan: The broker transaction will likely become a bigger factor, relocation networks are mature and in place, computerized loan originations [CLOs] have only been marginally successful, and commercial banks through their retail outlets are finding a need to increase volumes to support their customer base.

LaMalfa: What do you see as the major trend currently within purchased production?

Duncan: The switch from government products to conventional. We attribute this primarily to three events: the change in FHA's MIP [mortgage insurance premium], the VA no-bid issue and the enriching of servicing-release premiums for conventional products.

JAY BENDER, executive vice president, Norwest Mortgage, Inc., Minneapolis Purchased production began at Norwest Mortgage in 1984 as a way to provide its correspondent banks with access to the capital markets. In 1985, Norwest went national, and in 1988 the company brought on a sales force. In 1989, it added a convetional product line. Today Norwest has six regional offices across the U.S. The total volume in 1988 was $500 million in fundings. Volume rose to $1.7 billion in 1989 and $4.6 billion in 1990. For 1991, the company says volume will be between $6 billion and $7 billion.

LaMalfa: What does Norwest like best about purchased production?

Bender: The cost of origination is somewhat lower because the capital investment required to create the production is less. As long as the same quality and risk-management controls are in place as [there are] in retail, we feel the production can be of equivalent quality.

LaMalfa: What is Norwest's biggest challenge today in managing purchased production?

Bender: One of our big challenges is to go to the next step in our business plan. We won't enter a business in which we cannot be a dominant force. On the government side, we have become one of the dominant players. Right now we are trying to increase our conventional market share, including nonconforming production, so that we have a well-balanced production mechanism.

LaMalfa: Do you see purchased production growing as a percent of aggregate origination activity?

Bender: It's a tough discipline to be a good wholesaler; not every company is equipped to run an efficient operation. Most companies with sophisticated secondary marketing and risk management areas are already involved in purchased production. Moreover, a few [companies] have established a firm place in the market and, therefore, are tough to compete with. The accounting treatment and legislative changes dealing with how purchased mortgage servicing is recognized will also have an important impact on what happens to wholesale in the future. It will grow to the extent that additional companies decide to get involved.

LaMalfa: What trends do you see within purchased production?

Bender: Internally, we will continue to pursue the assignment of trade business. I see heightened competition for conventional loans as government production declines nationally.

MICHAEL BOLAND, vice president, IMCO Realty Services, Santa Rosa, California IMCO got involved in wholesale lending in California in 1983 as part of a plan to rebuild its lending volume after its 1980-81 business curtailment. Company officials state that it set up a program to provide efficient, convenient service and to establish the necessary quality controls to deal with mortgage brokers who had been let go by lenders during the slow times. Since 1984, IMCO has produced more than $15 billion in wholesale fundings. Vice President Michael Boland states that IMCO's experience with that portfolio is favorable--it has been a solid performer in terms of delinquencies. Of the $4.8 billion IMCO will fund in 1991, approximately $3 billion will be wholesale production.

LaMalfa: Does IMCO have a retail production arm?

Boland: Yes, we do. However, we operate in a number of different ways. In California we do wholesale lending but very little traditional, spot, resale lending. We specialize in builder takeouts and several telemarketing strategies. In other states, operating as North America Mortgage Company, we participate actively in retail production along with our wholesale effort.

LaMalfa: Given seven years of experience, what do you like best about wholesaling?

Boland: It allows us to efficiently access geographically dispersed markets. A local broker origination is a very cost-competitive way to do business.

LaMalfa: Would it be cost prohibitive to have a large retail network?

Boland: Large retail networks have certain fixed operational costs that can be adversely affected by the changing economy. Given the already thin margins associated with mortgage banking originations, this impact can be significant. In an economic downturn you have to support your retail branches in the hope that the market will come back. With a wholesale structure, the individual loan broker decides how best to manage his resources and the decisions are immediate, clean and simple. We do what we do best: market, hedge and deliver to the secondary market. The advantages to our investors are that they get the widest possible view to the marketplace and a geographic dispersion of risk. Managed correctly, [wholesale is] a very cost-efficient method of doing business.

LaMalfa: What are the biggest challenges for a wholesaler?

Boland: The biggest challenges are quality control and hedging and delivery of the pipeline. Because we hedge up to 100 percent of our portfolio at any given time, when we don't get delivery, we pay the price. So it is crucial that we know our customers' propensities to deliver and our pipeline position. Up-front quality control is very important to maintaining porfolio integrity. We stress quality control throughout our origination process.

LaMalfa: Do you see wholesale production growing over the next couple of years? And how will the origination process change?

Boland: Yes, I see wholesale production growing. Currently, loan brokers have no significant barriers to entry in this marketplace. I see that changing because of their growth and the significance of loan broker originations. My guess is that the agencies may become more involved with the loan broker approval process and the audit procedures. Loan brokers are going to be responsible for what they produce.

During the next three-to-five years, automation is going to change how we do business. A likely scenario might be that a loan officer using a laptop computer with a built-in cellular phone and modem will take an application and call a wholesaler's toll-free number. [The loan officer] will qualify the buyer by product type and program analysis via computer and have the applicant's file underwritten by artificial intelligence. A deal is struck, the homebuyer will lock-in his or her loan and get the TIL [truth-in-lending] and other disclosures printed immediately on a portable printer. In sum, the two biggest challenges facing brokers are quality control and automation.

LaMalfa: What do you see as the major trends occurring within the wholesale production mechanism?

Boland: First, there's a new awareness among brokers that they bring something to the table and that they're working with investors, not just submitting loans. The second big shift is that many banks and savings and loans have concentrated their efforts on the adjustable-rate mortgage market. In a falling-rate market borrowers most often select fixed-rate loans. This has created a real opportunity for loan brokers to become entrenched as the lender of choice in the fixed-rate market.

TERRY HALL, senior vice president, Chemical Mortgage Company, Jacksonville, Florida Chemical Mortgage Company entered the wholesale business in 1983 but did not have significant presence until August 1985. In 1986, the company produced just in excess of $800 million and it continued at roughly that production level in 1987. In 1988, Chemical made a decision to become an even more significant player by increasing its commitment to both management and resources. Production rose to $2.4 billion in 1990. In 1991 Chemical expects production to be $4 billion.

LaMalfa: What does Chemical like best about the wholesale business as a method of generating product?

Hall: Wholesaling allows the merger of several factors: first, it permits large volumes; second, it permits excellent risk management--you can sculpt a portfolio; third, it is profitable and offers excellent revenue-and-cost matching; fourth, it provides the flexibility to expand rapidly. In order for any suytem to outperform wholesale, it must do two things: one, it must control the customer base; two, it must provide the size and the economic efficiency needed to access the capital markets. Wholesale is not as labor intensive or brick-and-mortar intensive as retail. It's much easier to expand one's customer base quickly and build up the operational backroom support staff necessary to handle rapid increases in volume.

LaMalfa: How do wholesale costs compare with retail costs?

Hall: The wholesale cost structure is very attractive. The excellent matching of the revenues and expenses keeps you from being eaten alive by fixed costs. You have the ability to rapidly adapt your operations and costs to corporate needs.

LaMalfa: What do you see as the major trend occurring within wholesale production?

Hall: The first trend is that the major market players are using their already existing market share, their capital market access and their working capital to consolidate a greater market position. The competitive advantages of starting from that position are enormous. Second, there is a real customer focus on meeting the needs and desires of quality customers.

LaMalfa: Will wholesale continue to grow in the 1990s?

Hall: Wholesale will continue to grow as a market percentage because it is an extremely efficient production machine that can profitably increase market share. Wholesale brings together market and product flexibility, capital market access and working capital resources to make it the most efficient, cost-effective delivery mechanism in today's marketplace.

MARK JOHNSON, senior vice president, BancBoston Mortgage Corporation, Jacksonville, Florida BancBoston has been a wholesaler for more than 10 years and became a prominent player in 1988. Mark Johnson, senior vice president, states that the company's strategy has been to deal with the larger players in the metropolitan markets. BancBoston reduced its correspondent base from a high of more than 300 to approximately 100 correspondents. At the same time, it increased volume to about a $4 billion annual level. The company widened its delivery mechanisms to include assignment of trade in 1988 and co-issue transactions in 1989. About one-third of BancBoston's business now comes from flow, one-third from assignment of trade and one-third from concurrent transfer or co-issue. In June 1991, it started a table funding operation in San Jose, California, which the company intends to expand into other markets, such as Seattle and Denver, and eventually, nationwide. This year the program will exceed $120 million for six months' worth of production. BancBoston's budget for next year projects about $240 million of broker business out of a total of $5.2 billion in purchased production.

LaMalfa: What does BancBoston like best about wholesale as a method of production?

Johnson: The big attraction is the accounting treatment that we get compared to retail. Acquired business is lower cost. The other big attraction is the relationship building that you have, the customer relationships. We work to accommodate our customers long term. There is more loyalty in wholesale than in retail.

LaMalfa: What do you see as the major challenge in running a wholesale operation?

Johnson: The number of sellers, particularly the larger ones, is dwindling due to mergers, takeovers and acquisitions. You will see a trend back towards the small- to medium-size correspondent. Additionally, [there is] the issue of the more stringent net-worth requirements being pushed by the agencies, which will make it more difficult for institutions to operate. Combined, they will expand the table-funding type of acquired business. I don't think the normal purchase business will increase if PMSR [purchased mortgage servicing rights] remain an obstacle for bankowned mortgage companies. Unless that percentage is changed from the existing 25 percent level [of PMSRs that can count toward core capital], those players that have had to back out because of PMSR [reasons] will be supplanted by the GEs and the GMACs of the world. That's why I see less growth.

LaMalfa: What do you see as the key trends in wholesale mortgage banking?

Johnson: There is more co-issue or concurrent-transfer business being done by the major players, especially the nontraditional players. There is also less interest in flow and assignment of trade business and more in broker programs. Much of this has to do with the credit crunch and the lack of acceptable warehouse lending outlets.

LaMalfa: Is BancBoston looking at the regional picture any differently than it was at the start of the year?

Johnson: We have been moving into different markets--Texas, the Midwest and the Northwest. These are markets we will concentrate on more than before. We have pretty much been an East Coast/West Coast lender. We don't intend to see our volumes decline in those markets, but the expansion will be in the new markets.

RICK COSSANO, executive vice president, Countrywide Funding Corporation, Pasadena Countrywide began its wholesale efforts with the correspondent lending division in 1986. The program was originally called "Registry" because it allowed banks and S&Ls to register their loans and obtain a rate lock; they could pass the commitment to their borrowers and indirectly access Fannie Mae and Freddie Mac. The operation purchases closed loans from banks, S&Ls, mortgage bankers and credit unions. Correspondent lending also offers select customers concurrent funding if needed. Wholesale lending started at Countrywide in 1987 with three branches dedicated exclusively to mortgage brokers in Pasadena, San Diego and San Jose. It has grown from approximately $35 million at that time to around $400 million per month and the company has exceeded $3 billion for 1991.

LaMalfa: Can you give us a glimpse of purchase activity as it has grown over these past five or six years?

Cossano: When correspondent lending first began, they were purchasing about $25 million a month. It has now grown to more than $300 million a month. The correspondent lending operation deals with approximately 3,000 institutions throughout the country.

LaMalfa: How about the wholesale division?

Cossano: It started in 1987 with three branches. We were purchasing about $35 million a month of brokered business when I came on board in late 1987. Subsequently, we have grown to 21 branches, 11 in California and the balance throughout the country. Wholesale production has increased to more than $400 million a month.

LaMalfa: What does Countrywide like best about wholesale as a method of generating product?

Cossano: One of the best things is loan quality. Mortgage-broker originated loans have performed as good or better than those loans originated by our other divisions. Packaging quality, investor acceptance and loan delinquency have all been exceptional. We like that. Number two, we like the profitability of the business. Mortgage brokers are doing the originating and processing; that allows Countrywide to concentrate on underwriting, document preparation and funding. Since we don't have to hire loan agents and loan processors, we have less overhead costs.

LaMalfa: What is the major challenge confronting the manager of a wholesale department?

Cossano: The most difficult challenge for us is to accurately project our month-to-month production levels. Volatile environments make it difficult to project delivery and cancellation performance, which affects price and service. If we are priced aggressively and the market sells off, we can expect a large delivery. When the market rallies, it is very difficult to project what we will receive. When rates drop significantly, we are deluged with business and it is difficult to maintain an "exceptional" level of service. Service is the single most important factor to a mortgage broker. Price helps, but if your service is poor, you will never be successful. We are always looking for new and innovative ways to improve our service.

LaMalfa: Wholesale production as a percent of aggregate origination activity has skyrocketed in the past several years. Do you expect this growth to continue?

Cossano: We expect continued growth. The reason why is that with continued competitive pressures being placed on medium-sized mortgage banking companies, we expect many will fail because they can't compete. The larger, more highly capitalized wholesalers will be able to offer better products, services and staying power. Those that do not fail will continue to receive pressure from mortgage brokers or will themselves become mortgage brokers.

LaMalfa: Last year, Countrywide acquired $2.7 billion through wholesaling and correspondents. Your 1991 target was $3 billion earlier in the year. How are you doing relative to that?

Cossano: We have exceeded our target. I can't give you the exact number, but we are substantially ahead of our original goal.

LaMalfa: What have been the major trends occurring within the wholesale-correspondent business during the last few years? Are there any discernable shifts?

Cossano: In the last couple of years I have seen a shift away from mortgage brokers trying to originate every single type of product available. Many are becoming more specialized. We used to see mortgage brokers originating firsts

and seconds, conventionals and governments. They would do it all. We see very little of that today, as more and more mortgage brokers are specializing in a particular area, such as jumbo products or second mortgages. I've even seen some mortgage brokers specialize in dealing with the self-employed borrower.

BARON WILHELM, vice president, Sears Mortgage Corporation, Riverwoods, Illinois Sears Mortgage started in 1985, and became involved in correspondent lending in 1987. In 1988, volume was between $300 million and $400 million. In 1989 it was about $500 million to $600 million. It doubled to around $1.2 billion in 1990 and the company expects it to exceed $1.5 billion this year. Correspondent lending has gone from an adjunct business to a strategic business program. Sears has two basic acquisition vehicles: the mortgage securities conduit, which purchases loans servicing-retained, and the mortgage corporation, which buys loans on a servicing-released basis. Combined, the company has the Sears Mortgage Purchase Programs.

LaMalfa: What does Sears like best about purchased production?

Wilhelm: Purchased production allows us to utilize economies and process efficiencies, assuming we're bringing in quality originations. It provides both primary and master servicing, it enables us to staff for a continued flow of business, and it allows us to acquire current-rate originations. A nice annuity income stream is also produced.

LaMalfa: What is purchased production's biggest challenge?

Wilhelm: The major challenge is to produce quality. We have shifted from government originations to conventional because we have a little more control over quality. Unfortunately, fraud has become a cottage industry in some parts of the country. You must check a seller's operations, financial statements and references to know who to do business with.

LaMalfa: Do you expect wholesale mortgage banking to grow in the 1990s?

Wilhelm: My sense is that the correspondent and wholesale business will grow in the next few years. As to its long-term growth, I think there has to be some cap. Origination volumes will only grow so much per year. However, for the next four or five years, retail production will still be the main driving vehicle. Somewhere down the line, I think CLOs will take a larger place.

LaMalfa: What is the trend within the wholesale market?

Wilhelm: The major trend has been in the quality area. History proves that people who try to end-run quality have floundered, including medium to very large mortgage companies. Companies are spending a great deal more for QC [quality control] systems, and they are paying more attention to service. Price is important, but the quality of your marketing and service is even more important. You must maintain competitive pricing and provide consistent customer service.

LaMalfa: What new trends do you see for the wholesale business?

Wilhelm: Wholesale lenders are returning to the assignment of trade business because the yield curve is very steep. This also improves earnings. To acquire AOT business, you must have a facility that can quickly process the loan, maintain quality, not develop bottlenecks and be staffed appropriately. Assignment of trade customers generally have a larger net worth, a longer history of quality origination and verifiable references.

LANE TERRELL, vice president, Greenwich Capital Financial, Inc., Dallas Greenwich Capital purchased its first loan in September 1987 and ended the year doing about $40 million--strictly FHA/VA loans. In 1988, the company began a conventional, mandatory delivery program and increased its volume to a little more than $1 billion. Greenwich Capital started the best-efforts delivery program for conventional and government loans and its correspondent broker program last year. In 1990, Greenwich Capital sold its retail operation. The total wholesale volume for 1990 was nearly $2.5 billion.

LaMalfa: Earlier in the year you indicated the company's purchase target for 1991 was $3 billion. Where are you relative to that target?

Terrell: We're approaching it; we'll be between $2.5 to $3 billion in total acquisitions this year. We're originating through the correspondent network, mandatory, best efforts and bulk acquisitions.

LaMalfa: What do you like best about wholesale as a method of generating product?

Terrell: It's extremely cost effective and less staff intensive. We don't have commissioned loan officers and it also allows us to operate on a nationwide basis without brick and mortar. We can quickly and easily penetrate a market or, if necessary, withdraw. It's a good source of servicing.

LaMalfa: How profitable is it compared to retail? Is it substantially more profitable?

Terrell: We sure see it that way. Our fully allocated cost of origination on our correspondent broker business, which is now somewhere around 80 percent of our volume, is 30 basis points. That's a cost difficult to achieve in retail. Our product is 100 percent conventional with a $110,000 average loan balance. It's all Fannie Mae and Freddie Mac [product] and [is located] in good geographic areas for valuable loan servicing.

LaMalfa: What's the major challenge for a wholesaler?

Terrell: The major challenge is managing the risks in the mortgage broker program. On the correspondent, mandatory or best-efforts side, we don't have the same pipeline risk. We have developed a lot of things during the last six months to help us control our pipeline risk, including some new administrative positions. Their sole function is to obtain pipeline listings by broker. If the loan is not here 15 days before lock expiration, we ask the status of the loan. We also follow up on each cancellation directly with the borrower, to verify the status of the application. Also, we do title searches: if a company pulls out because of price, they go on a 30-day suspension of lock-in privileges; if it happens again, they're out. We take pipeline protection very, very seriously. We police our correspondents to maintain a fallout ratio of less than 25 percent. We feel that is a good [record] considering we are dealing with 200 to 300 brokers across the country.

LaMalfa: Do you see wholesale activity growing in the 1990s?

Terrell: It's got to keep growing. We're seeing a proliferation of mortgage brokers. There are new shops opening up every day. Retail doesn't make sense to many of the traditional institutions. Retail loan officers are saying, "Hey, wait, I'm making half a point doing this. Why don't I open up a shop, hire a processor and take the full point? I can sign up with about 10 wholesalers to give my borrowers and my real estate clientele a diverse product, full-service arrangement." It is difficult for any retail shop to have that large and flexible access to the capital markets.

LaMalfa: What major trends do you see in wholesale production?

Terrell: Three or four years ago, mandatory, and to a lesser extent best-effort delivery was typical. The broker shops were not nearly as prevalent. Today, many major mortgage companies, savings and loans and banks have developed some type of correspondent program to make use of the cost-effective means of originating through the broker community. You must have superior quality control and know what you're getting involved with to make sure that the product you're bringing in is sound. We don't schedule closings until we have the underwriting and quality control approvals.

ROY KASMAR, senior vice president, Prudential Home Mortgage, Clayton, Missouri Prudential Home Mortgage (PHM) created its Lender Express (LEX) program in late 1987. The program focuses on mortgage bankers, thrifts and commercial banks--companies with a funding capacity who want to access the secondary market. Prudential did about $300 million in fundings in 1988, about $1 billion in 1989 and $2.3 billion in 1990. The company projects LEX fundings for 1991 will be in excess of $4 billion. Prudential's Mortgage Express (MEX) business focuses on broker originations. Last year Prudential did $5.8 billion including corporate-sponsored business. For 1991, the amount of total production is projected to be approximately $10 billion, roughly 60 percent of which is in wholesale production. For 1992 the company projects continued growth in all lines of business.

LaMalfa: What does Prudential like best about purchased production?

Kasmar: There's a couple of things. One, the cost of acquisition, because of our centralized processing approach, which allows us to acquire mortgages in an efficient manner. This, in turn, allows us to pass along aggressive pricing to our customers. Two, flexibility--not having brick and mortar around the country--which allows us to enter and exit markets whenever appropriate. If we want to go into Texas, we don't have to open branch offices, we can be there by getting customers in that location. In fact, we originate in 49 states today. Three, we believe the quality of the loans produced is very good because we deal with quality players and have the appropriate quality control programs to monitor and manage the loans we acquire. So, cost, flexibility and quality are the things we like about wholesale.

LaMalfa: What is the major challenge of operating in this mode?

Kasmar: Making sure we maintain excellent service levels. This is critical because of our rapid growth: we must make sure we have quality people and maintain our training programs and service levels.

LaMalfa: Do you see purchased production accounting for a growing percentage of business going forward?

Kasmar: It will grow as long as large, well-capitalized players focus on acquiring assets in this fashion. On the other side, there are medium and small-sized entities that are focused on originating. Wholesale is a cost-efficient way for both parties to access the market. The smaller player dealing in the local market and the larger player buying, securitizing and servicing.

LaMalfa: What are the major trends occurring within purchased production?

Kasmar: It's no great secret the industry is moving towards eliminating the no-doc and low-doc programs. That will continue as the focus on quality continues. Players like ourselves are willing to pay up for higher quality, more fully documented loans. Will true, no-doc programs disappear? I don't think so, but wholesalers will scrutinize them more carefully than in the past. Higher quality loans will get better pricing. Secondly, we see more and more people willing to sell servicing-released.

LaMalfa: Has there been a shift in the supply and demand for assignment of trade and co-issue programs?

Kasmar: As you know, we bought America's Mortgage this spring. That acquisition brought PHM into the FHA/VA assignment of trade business. We wanted to be in it for several reasons: first, it accesses a market in regions where we don't do a lot of conventional business; second, it accesses markets we have not been in historically. LEX predominantly buys conventional, nonconforming loans; MEX buys a higher percentage of conventional, conforming loans.

LaMalfa: Is PHM looking at regional markets any differently than earlier in the year?

Kasmar: We view Texas as a big opportunity going forward, as well as Florida. California will continue to be a major market for us. Over the past 30 to 60 days we have seen a significant pick up in production in the Northeast, so we are hopeful the region is turning the corner.


1990's Top Ten Wholesalers
 Purchased Production
 (& in billions)
 1990 1991 P
Fleet Mortgage Group (1) $ 9.6 $ 8.4
Norwest Mortgage 4.6 6.0
BancBoston Mortgage 4.1 3.5

Marine Midland

Mortgage 4.3 1.6

Prudential Home
 Mortgage 3.8 6.1
IMCO Realty Services 3.5 3.0
America's Mortgage (2) 2.8 2.3
Countrywide Funding 2.7 3.0

Greenwich Capital
 Financial 2.5 3.0
Chemical Mortgage 2.4 4.0
Sears Mortgage (3) 1.5 1.5
 Total $41.8 $42.4

(1) Includes Fleet Mortage and Fleet Real Estate Funding. (2) America's Mortgage was acquired by Prudential Home Mortgage May 1991. (3) An 11th company, Sears Mortgage, was added to the list in 1991 to more accurately reflect the current top 10 wholesalers after the acquisition of America's Mortgage by Prudential Home Mortgage.

Thomas S. LaMalfa is president of Wholesaling, Inc., a mortgage consulting firm in Shaker Heights, Ohio.
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Title Annotation:interviews with managers of the 10 largest mortgage banks in the U.S.
Author:LaMalfa, Thomas S.
Publication:Mortgage Banking
Article Type:Cover Story
Date:Dec 1, 1991
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