The differences in dealing with the Big Bank (as in too big to fail) mortgage operations, Mortgage Bankers and Mortgage Brokers each have their own advantages and disadvantages. While the Big Bank mortgage operations enjoy the economies of scale in boosting their output, their bigness creates their biggest obstacle to delivering product in a timely manner.
As a result it is not uncommon for them to be slowest, because their methods are not unlike Henry Ford when he was pioneering mass production. If I were to choose an animal to describe their nimbleness, I think an elephant would be the correct choice. While they have an almost infinite source of funding capacity, any economies of scale are lost to their inability to detail the individuality of the files they process which increases cost and time loss.
Like Henry Ford, they believe that they can originate loans more cheaply by having unskilled or semi-skilled workers doing repetitious duties in promoting a file from step “A” to step “B” and so on. Henry Ford proved that he could produce more cars at less cost by using unskilled and semi-skilled workers than other manufacturers employing expensive, highly skilled workers. Originating loans is nothing like building a car.
When an unskilled assembly line worker bolts the wheels on a car, that worker doesn’t need to check any of the work that was completed by others earlier in the line. He knows that someone else did exactly what was needed when it passed their station on the line (it’s not my job). Unfortunately, on a home mortgage, as the new file moves from one semi-skilled worker to another, none of them knows much more than their isolated function. The skilled screening gets kicked down the road, and when the skill people finally review what others have done, it often triggers additional steps and back-tracking on the information gathering, thus slowing the process, lowering the level of appreciation from the borrowers, and increasing the cost of that particular file. No two borrowers are exactly alike, which is why the assembly line model doesn’t work so well. On a loan file, to be efficient, everyone that touches the file needs to acquaint themselves with its’ contents. The time required for a loan processor to understand a file is time consuming. For this reason alone, small skilled-team processing will out perform assembly line type models on all but the most basic applications.
Mortgage Bankers originate mortgage loans with their own money and funding mechanisms. After the loan has been funded, they usually sell the loans to one of the Big Bank Wholesale Operations, or to one of the GSE’s (Fannie Mae or Freddie Mac). The larger mortgage banking companies operate similar to the big banks, with operation centers, but because most are smaller, they’re generally a bit more organized and efficient than their big bank competitors. I’d compare them to donkeys. Many are much more nimble than their elephant competition. They sell most of their loan production either to the big banks or to the GSE’s (like the big banks do). Many of them service the loans they originate (like the big banks do).
Prior to the late 1980’s Mortgage Brokers were few. They primarily focused on “B paper” (also called “hard money” loans), the less desirable loans (high cost) that didn’t qualify for traditional mortgage programs. That changed very quickly after our Government empowered the RTC (Resolution Trust Corporation) to shut-down most of the nations’ largest home mortgage lenders when they were unable to adjust quickly enough to new legislation enacted by the Federal Government.
The collapse of the Savings & Loan and Savings Banks shook the entire home lending industry in the late 1980’s. Tens of thousands of the best home loan originators found themselves unemployed through no fault of their own. This created a small window of opportunity for them…collect unemployment and learn new skills, or become independent loan origination engines. While the consensus of opinion identified the riskiness of starting a new business model from scratch, many of the displaced loan originators considered risk to be the lesser of two evils and formed small “boutique” home loan companies. They used their knowledge and skills to assemble files and used money from a variety funding sources to close the loans. Within a few short years the new “A paper” Mortgage Brokers had quickly earned a reputation as the best source for mortgage loans and gained market supremacy. They were very agile and many were at the top skill level in the industry.
Starting with just a shoe string of capital, Mortgage Brokers entered into business arrangements with the elephants and donkeys who anxiously bought their unfunded loan files and funded them for the borrowers. Brokers had access to a wide variety of funding lenders, who in turn followed a wide variety of differing underwriting idiosyncrasies. The Brokers adeptly sold individual loan files to the lenders known to favor the files with specific quirks. The animal that would best describe the Brokers would be a cheetah. They’re quick, nimble and specialized.
Today the elephants account for over 70% of the new home loans by originating loans themselves, by buying funded loans from the donkeys and by funding and retaining brokered loans from cheetahs.
In the ecosystem of loan origination;
- the cheetahs are on the endangered list,
- many donkeys are redefining their business model, absorbing many of the weaker cheetahs, and
- elephants have been “blessed” with hundreds of millions of your tax dollars after being described as “too big to fail” by our Federal Government.
The elephant’s ploy to get the money (called stimulus) was that they agreed to open the (money) flood gates to keep the US economy afloat by making loans to small businesses to cover their payrolls, operating expenses and expansion and to increase the availability of home loans. None of those agreements between the Government and the elephants was ever put into written contracts.
As I write this, four years later, those elephants have done very little along the lines of their “agreements” with our Government. Instead, much of the money was used to buy the good assets of other failing banks and mortgage bankers. This didn’t help the economy much, but the elephants were treated to incredible bargains that bolstered their balance sheet bottom lines (a measurement that many use to quantify executive bonuses).