Finding good brokers

STRONG RELATIONSHIPS BETWEEN MORTGAGE brokers and wholesalers are critical to wholesale lending. There is nothing new or trendy about that. Wholesalers depend on brokers to bring in good business and to act ethically in their dealings with the mortgage-buying public. Wholesalers have long recognized the need to ensure that their brokers are adhering to the highest standards.

Such considerations have become even more important in the current record-breaking refinance market, where there has been a surge in the number of mortgage brokers.

Mark Hammond, chief executive officer of Flagstar Bank, Troy, Michigan, says that the growth in mortgage volume has attracted people to the industry. There are more brokers, more loan officers and more originators, Hammond says. This year is on course to exceed the $2 trillion-plus market of 2001, he says.

"Certainly the overall market is the best it's ever been," Hammond says, "both from a new-purchase standpoint as well as a refinance standpoint."

Hammond notes that brokers tend to be more efficient than some of the larger lenders at taking advantage of a refinance environment. Being entrepreneurial and relatively small, he says, these firms can ramp up easily, hiring and training new people. Brokers, he adds, generally gain market share in a good production environment.

"It's a very generous market," adds Robert Shrader, senior vice president at National City Mortgage Company, Miamisburg, Ohio. "We're at all-time production highs."

In such a heated atmosphere, signing up the right brokers demands efficiency in due diligence and thoroughness in checking backgrounds. And once the brokers are on board, their performance should be monitored carefully. A market that offers wide variations in products and terms can create temptations for some brokers to act less than honestly.

Mortgage brokers, of course, do not fall under direct federal supervision. And rules on qualifications and broker licensing vary from state to state. States also apply different degrees of rigor to background investigations for would-be brokers.

There is a potential wealth of information available on brokers. Wholesalers can look at a firm's financial performance, its disciplinary record, the quality of its marketing, its reputation within the local industry community, its competitiveness and the activities-both positive and negative-of its principal employees. The growing sophistication of technology is making all this easier. In addition to public records, online newspaper archives are easily accessible.

A small group

Jim Cassidy, head of the Wholesale Lending Division at SunTrust Mortgage Inc., Richmond, Virginia, has been pushing his salespeople for some time to work harder at building broker relationships.

SunTrust has been getting a lot of interest from brokers. Cassidy, however, is not actively looking to increase SunTrust's broker base. He is more interested in nurturing existing relationships.

Cassidy says that SunTrust's salespeople might each have a total of 30 to 4o accounts. In each case, he says, the majority of the business is likely to come from six to eight firms.

SunTrust Bank Inc., with assets of sio8 billion, is headquartered in Atlanta. Its banking operation, with more than 1,100 branches, is concentrated in the Southeast, extending from Maryland and Tennessee in the north, to Florida in the south.

In 2000, Cassidy says, SunTrust did $3.6 billion to $3.7 billion in wholesale mortgage business, using 2,200 brokers. Twenty percent-or about 440-of those brokers represented about 78 percent of that business. In 2001, Cassidy says, SunTrust almost doubled its volume, with lo percent fewer brokers. In 2001, he adds, 40o brokers brought in 78 percent of the business. Cassidy says that the bulk of the business coming in to his 60 or so salespeople is driven from six to eight customers. Cassidy stresses the importance of the broker relationship. "When you do consistent business with a broker," he says, "you get a better process flow. They know your processes, expectations, peopleand you know theirs."

One benefit from using a smaller broker base is that it can help a wholesaler avoid problems with due diligence. "By and large, we know our customers," Cassidy explains.

A complete background check

The active refinance market has not led InterFirst Wholesale Mortgage Lending, Ann Arbor, Michigan, to "do things that much differently" in evaluating brokers, says William Newman, InterFirst's president. "I think we're probably more controlled than we are normally."

In considering a broker, InterFirst looks at references and all available public records. The company also conducts background checks and, to the extent that records are available, performs some credit analysis of a broker's business. InterFirst Wholesale Mortgage Lending is a division of ABN AMRO Mortgage Group Inc.

Some states, Newman agrees, have tougher regulatory regimes than others for policing brokers. He notes, for instance, that Ohio recently passed a very good statute relating to broker licensing. "The Ohio statute involves background checks, licensing, initial education and ongoing education," Newman says. "Simply put, it reasonably raises the bar for originators to enter and participate in the business."

Cassidy says the difficulty in staying current with state regulation and legislation led SunTrust to pull out of third-- party subprime lending around the beginning of 2001. "It's really too much to keep up with," he says.

Cassidy says SunTrust has a highly developed broker-- approval process. SunTrust will look at financial statements, resumes, credit histories and possible disciplinary action. It also relies heavily on its salespeople both to evaluate potential broker-partners and to create the right kind of relationships.

"It's paramount that [the salespeople] know their market," Cassidy says. "And they have to buy into our philosophy of building relationships, which means there are only so many accounts you can handle."

Newman says the increased level of business in the current environment means that InterFirst can be even more selective [about new brokers] than at other times. He says that brokers are approaching the company in droves. "We've been pretty good at being able to provide capacity and throughput in this type of market environment," he says.

The best brokers, Newman says, are both good salespeople and good businesspeople. He likes organizations that are run the way that InterFirst likes to see itself-"very aggressive, very sales-oriented." InterFirst relies on its own salespeople as the main source of information on brokers. "More than anything, for us it's the level of experience [of the brokers] and their reputation in the marketplace," Newman says.

Relying on sales staff

Shrader agrees there is strong competition to sign up the best brokers. National City Mortgage tries to offer brokers the strongest possible support. Brokers can, for instance, deal with National City's centralized hub or work through the company's branch network. "Service is more than a priority here," Shrader says. "It is really an obsession."

As of mid-September 2002, Shrader says, National City Mortgage had surpassed its 2001 total of $28 billion in wholesale business. Over the last year, he reports, it has added about 2,ooo brokers, bringing its total to around io,ooo. National City Mortgage has also increased the number of its hub branches from 19 to 30, Shrader says.

When selecting brokers, National City Mortgage also relies heavily on the judgments of its sales staff. "We encourage them to get to know the broker," Shrader says. "And we encourage them to try to find broker leads that have been referred to them from third parties they have confidence in."

Steve Nadon, chief operating officer for Option One Mortgage Corporation, Irvine, California, has had no difficulty in locating good brokers. "We've been around now for 10 years and have got a fairly decent reputation," Nadon says. "So we tend to find that the brokers in new markets find us as fast as we find them."

Nadon is not sure that the active refinance market is having much effect on the recruitment of brokers. While the low-- interest environment is helping brokers to stay busy, he says, it is not influencing Option One's efforts to grow its business.

Nadon notes that the nonprime market, which Option One serves, is insulated against fluctuations in interest rates. "We don't go through the volatility that you would find in the prime world," Nadon says. "[Prime lenders'] business is very much driven either up or down by what interest rates do."

Rather than taking on new brokers, Nadon says, Option One is more likely to be seeking more salespeople to service both new markets and existing markets where it is trying to increase its penetration. According to Nadon, Option One likes to gives its salespeople relatively large territories. Each member of the sales staff is likely to have a roster of 75 to 100 brokers. The goal, Nadon says, is to prevent the individual salesperson from becoming too dependent on one broker.

Option One's salespeople tend to rate brokers according to the quality of the business they deliver, says Nadon. Each group of 75 to 100 brokers, he says, is likely to have a core group of 15 to 20 who are producing the majority of the salesperson's business.

But these groups can be fluid, especially in the nonprime sector. Nadon says a broker who might not be bringing business in at one point might blossom four months down the road. Conversely, a big producer might suddenly trail off. The cause could be problems within the firm or a decision to shift more toward prime business. Brokers who stop sending in business, Nadon says, would not be automatically dropped. But they "would not get as much of our salesperson's time."

Option One tries to stay alert to the needs of brokers, Nadon says. The company follows brokers' advertising, for instance, to get a sense of the products they are offering. By constantly trying to improve its own products, Option One reasons, it will improve its service to the brokers.

Option One also seeks to educate brokers in the intricacies of the nonprime market. Nadon says this means "spending a lot of time on what the real underwriting criteria and differences are between our product" and other segments of the mortgage market. Option One's salespeople stress the importance of the prequalification process, so that brokers will get an early feel for which applications are likely to win approval and which ones are apt to be rejected.

Before accepting a broker, Option One will sound out the firm's reputation in the market. Like other wholesalers, Option One relies heavily on the advice of its salespeople, who are expected to submit information upward to branch managers. Option One satisfies itself that the required state licenses are in place. And it requires brokers to sign agreements that define the terms of the relationship. The overall goal, Nadon says, is the creation of enduring partnerships.

A broker maintenance department

Option One's broker relationships are approved at the corporate level, where a broker maintenance department will carry out quarterly performance reviews and an annual confirmation of a brokerage's licensing status. The updated information is relayed back to the branch manager and the salesperson.

Option One's loan processing system ensures that loans will not exceed state or federal high-cost thresholds. The company also provides training and guidelines to its branch associates to ensure they thoroughly understand both state and federal requirements. Option One, Nadon explains, does not offer the higher point and fee-type loans that fall under the high-cost loan covered category. "Our brokers know that we do not make loans like that," he says, "so they don't submit that type of business to us."

Option One is careful about monitoring brokers who submit loans that have high first-payment default rates, high delinquency rates and high loss rates. Option One also keeps an eye out for any negative trend in a broker's loan performance. In such instances, Nadon says, the company will talk to the broker and try to resolve the problem.

If a broker does not react well to that approach, Nadon says, Option One might decide the relationship does not have a long-term future. But in most cases, the response is very positive. "The brokers like to learn," Nadon says. "They always want their business to get better."

Competition keen to sign up brokers

Nadon says there is competition to sign up the best brokers-- those who are doing a lot of volume and have good reputations for producing quality business. The best brokers, Nadon adds, are also very good businesspeople. These brokers, he says, do their best to match their products to the customers' needs. They also do not get greedy on points and fees. Such brokers are likely to be blessed with abundant customer referrals. They also conduct a lot of business with friends and relatives. "Those brokers tend to do very well over the long term," Nadon says. "And they're the kind of people we like to work with."

Technology, Nadon says, is becoming an ever more important part of Option One's business, on both the origination and servicing side. Brokers, he says, are mainly interested in using information technology (IT) to get quicker loan approvals. They want faster delivery of documents and more rapid funding decisions. Brokers also tend to be interested in automated underwriting, electronic prequalifying and electronic loan documents.

Option One is focused on the performance side of IT. This means maintaining the quality of its internal databases. "We have great databases," Nadon says, "because we have serviced every loan we've ever made from inception. So we've got io years' worth of history on all of our loans."

Flagstar's Hammond is confident that the new-purchase environment will remain strong once refinance business dries up as the recovery pushes up rates. The only possible discouraging factor, he says, would be a very large jump in interest rates.

A normalized origination market of $1.3 trillion to $1.4 trillion would trigger exits from the industry "at all levels," Hammond says. The rate of departure, he adds, would depend on how fast interest rates move up. Hammond recalls the rapid industry contraction that took place in 2000 when the Federal Reserve Board was raising interest rates. A return to these conditions, he says, could lead to "a Darwinistic survival-of-the-- fittest atmosphere. Margins will get tighter. Pricing will get more competitive. Things will get a little bit bloodier."

Another possible scenario, Hammond says, would be a slow, staggered, Japanese-style recovery, accompanied by a creeping rise in interest rates. In such an environment, he says, the industry departures could take place over a number of years.

Always a place for brokers

Hammond is confident there will always be good opportunities for mortgage brokers and originators. But he does note the continuing, long-term consolidation among servicers, securitizers and aggregators. While the market will not be friendly to small or midsized entrants in this area, Hammond says, it will continue to welcome "people who are entrepreneurial and provide an opportunity for your large wholesalers to outsource the origination capability [to] entrepreneur originators."

The biggest threat to mortgage brokers, Hammond says, is the toughening attitude of the Department of Housing and Urban Development (HUD) on fee disclosure for brokers. New proposed federal rules in this area, Hammond says, could bring about a large-scale migration of loan originators from brokerages to correspondents. He believes that more brokers will apply for warehouse lines-effectively becoming mortgage correspondents.

Flagstar would welcome such a change. Hammond believes that it would improve the service level to the consumer, and the brokers themselves would be more in control of their destinies. It would also suit Flagstar's concentration on the niche area of servicing new entrants to the correspondent sector, he says.

Flagstar, Hammond says, has exactly the number of brokers that it needs. It has 6,ooo active mortgage brokers and correspondents, up from about 4,500 a year ago. Hammond does not see Flagstar needing fewer than its current number of brokers/correspondents. This view is a reflection of his confidence that Flagstar's business will continue to grow, whatever direction interest rates take.

Hammond points to the benefits of information technology. "Our focus," he says, "is on changing the business model from buying loans, buying paper, buying files to acquiring data."

This strategy, Hammond says, has involved removing paperwork from day-to-day operations. To reach this goal, Flagstar is developing its imaging capabilities. "We're about two-thirds complete on the cycle of really having an efficient business model," Hammond says. "And I think we're ahead of most of our competitors on that. I think a lot of our customers realize that."

An uptick in fraud

InterFirst's Newman rejects the popular wisdom that fraud declines in a busy market. According to that theory, business is strong enough that people feel they can make money without cheating. On the contrary, Newman says, InterFirst has found "a little bit of an uptick" in fraud. He suggests that the increased levels of activity have tempted some people to try to slip some things through. The result, he says, is that InterFirst must be even more diligent.

InterFirst, Newman says, looks at how brokers source their business, paying particular attention to "niches where there may be more stretches from a credit or collateral perspective." InterFirst also watches nonmainstream firms, such as those that only do refinancing. Newman says that some wholesalers will also consider a broker's personal credit history. But he would not get into this area, unless the brokerage itself was a full proprietorship.

National City monitors its brokers through its branch scorecard, a monthly performance assessment that looks at such categories as delinquency rates and pipeline management. The system allows National City to zero in on the performance of individual brokers. For example, firms can be measured for their delinquency and pull-through rates and the quality and timeliness of documentation and insurance placements. The object of such scrutiny, explains Marty Coleman, senior vice president and manager of National City Mortgage's wholesale operations, is "to make sure what we're purchasing is what we believe we are purchasing."

According to Newman, InterFirst signs up an average of "between 50 and 200 organizations a month. And right now it's more on the lower end of that spectrum." Once the firms are on board, InterFirst monitors the ongoing relationship. In the early stages, Newman says, InterFirst will be a "little more stringent from a review and an audit perspective." He calls this "prudent risk management."

InterFirst also remains alert for any attempts by a new broker to cut corners. An example, Newman says, might be the use by the broker of "value-added InterFirst service offerings without adhering to the guidelines for those offerings." Newman says, "If they are doing that early, we are going to be on it a little bit quicker."

Watching for red flags

Wholesalers are also sensitive to any signs of major trouble. Cassidy says that any suggestion of fraud would be "a major red flag." Newman would be suspicious of a broker who had moved from state to state or from organization to organization. He says the general lack of licensing requirements for individual originators means that people "can fly under the radar screen for a while." Newman says that Inter First has done much to track such people. He expects this task to become easier as information technology improves.

Wholesalers look askance at multiple locking of the same loan. SunTrust's salespeople, Cassidy says, are very clear on this point, and unacceptable behavior is likely to lead to a discussion with a broker. Cassidy looks for a pull-through rate of at least 70 percent from a broker. He adds that the better accounts hit 8o and 85 percent.

Cassidy believes that multiple locking has actually declined in the current market. He notes that SunTrust's pull-through rate was higher than ever in 2001. "If you got a loan through somebody's system," he says, "you don't want to move it."

Newman is not overly concerned that a plunging interest rate will tempt brokers to play all sides of the street at once. "It's so busy," he says, "that good, smart businesspeople don't really have an opportunity to play one off another. They just kind of want to get their deals done."

Inducing loyalty

Newman says that a wholesaler's strength is a further inducement to loyalty from brokers. When price was the main consideration, he says, brokers were quick to play one wholesaler off against another. Now, he adds, brokers are looking to the wholesalers to help them become more productive. This means brokers are scaling down their partnerships and targeting fewer organizations, Newman says.

InterFirst would hope to get at least 20 percent of a broker's business. Strong commitments, Newman says, build strong relationships. And better relationships mean that the wholesaler does not have to do as much individual due diligence on each transaction. InterFirst can show its appreciation to loyal brokers through more progressive service offerings, better technology and more attractive pricing.

SunTrust, Cassidy says, hopes to get one-third of a broker's business. This, he says, is enough to build on. "If you run into glitches on that," he says, "you're both willing to sit down and work them out. And we do."

Newman says IT is one of InterFirst's "great value-adds." He says that individual originators are unlikely to have the ability to develop the kind of technology to make the relationship work. Newman says InterFirst is adept at linking into a broker's origination system. "They are going to be better off," he says. "And we are going to be able to leverage our scale better." This link, Newman says, "involves an easyto-use data-transfer mechanism from the originators' LOS [loan origination system] to our MOAITM [Mortgages Online at InterFirst] wholesale portal. The transfer of data results in nearly instant decisioning and information, and eliminates redundant and wasteful data entry for both the originator and the wholesaler-in other words, a win/win scenario."

SunTrust is making more effective use of the Internet, using the Web to lock in loans, get its rates out and deliver closing documents. SunTrust also uses automated underwriting, which allows more loan closings per employee. And in the last couple of years, Cassidy says, SunTrust has centralized such functions as locking loans in the Richmond office. "We're getting cleaner deals than we've gotten in the past," he says.

SunTrust's salespeople also train brokers in the use of technology, further cementing relationships. Three years ago, Cassidy says, SunTrust held a series of two-day training sessions on Fannie Mae technology. There were about 120 sessions around the country, with each attracting about five broker accounts. The following year, SunTrust concentrated on training its salespeople, who were then sent out to teach the brokers further.

Newman seeks to establish collaborative efforts to get the most out of brokers. This is particularly true for the larger accounts. Performance can be tracked on a daily basis. If a broker is not bringing in the business, InterFirst will talk to him or her to see if there is a mismatch in either business model or philosophy. If things can't be resolved, InterFirst might suggest the relationship end, with the possibility that things be re-evaluated in the future.

The distortions brought about by the current boom market have not changed the basics of wholesale lending: Productive relationships between wholesalers and brokers depend on hard work and high standards. The value of good longterm relationships is further underlined by the certainty that the current low-interest refinance market will eventually come to an end.

InterFirst, for one, is already preparing for the return of what Newman calls a "purchase-driven normalized market." InterFirst has high hopes, for instance, for its construction lending program. "We want to make sure that people aren't coming on board just to get their loans through for the next several months," he says. MB