This Is One You Really Need to Read

This is a guest post written by Clarion Mortgage CEO, David Marr. David is nice enough to allow us to re-print internal emails and commentary that he sends out to Clarion LO’s and management. Company specific and proprietary information have been removed.

Clarion CEO, David Marr

The question has come up many times “Is the brokerage business going to survive?”

I recently had factors explained to me that moves my answer away from just having a positive faith into a more realistic understanding of what elements will determine the outcome. Economic systems live or die on economics. Seems simple enough. If the brokerage channel is economically viable, then it will survive; if not, it won’t. If companies are economical, they will survive; if not, they won’t. And of course, the same is true for LO’s.

In my discussions with that lender, I now have a better understanding of how fallout plays into the economic model and what lenders are going to do differently now to ensure their own survival. Brokerage channels are inherently more unreliable and inconsistent on fulfilling lock promises than retail banking. As such, the secondary market is paying substantially less for broker commitments than the equivalent banking commitment. When bank retail LO’s lock loans, they don’t have the ability to move the loan for a better rate. The reason I bolded above is broker LO’s vary on pull through from 10% to 45% back to 100%. It’s that inconsistency that prevents lenders from picking, say 40% fallout as the number. When you want the lock to exist, you want your cake. It’s just broker LO’s want both.

Lenders need to have 75% pull through in order to make money. Think about it: in order for them to sell their portfolios, roll in all the costs of their operation, roll in all the “touches” on files that close and all the files that don’t close, the lost hedge fees on loans that don’t close, plus all the losses that occur on buybacks – 75% is the bar they have set. When a company is below that, they lose money.

As you’ve seen, lenders are starting to differentiate between profitable companies and unprofitable companies. Clarion’s volume makes a lender’s effort at rehabilitation worthwhile. That lure is always there, but if the relationship doesn’t work, it doesn’t work. Clarion has long talked about fallout as a major problem, but lenders and Clarion have been giving it only lip service in the past. No longer.

If the brokerage business is to survive, the broker has to make it so the lender wins. No lender, no broker. Since the lender knows the relationship is symbiotic, many lenders are creating pricing tiers to incentivize companies to figure it out. That is only the first step. Lenders are now dropping unprofitable mortgage as they try to improve their execution price with Fannie/Freddie. In other words, the brokerage business will be smaller, more focused, more partner-like than what has been in the previous “sales” model of mortgage brokering. Clarion/Catalyst plans to “partner” with its top lenders and assure top tier pull through in order to get the best from each company. We need to make that commitment to them which will assure our mutual survival.

A very important shift must occur to be successful. The LO must shift their thinking to make sure the lender wins 80+% of the time. The math is very, very simple: What’s the dollar volume that gets locked? What is the dollar volume that closes? What’s the ratio?

Here’s the tough part. It doesn’t matter:

• That the house didn’t appraise
• That the borrower didn’t qualify
• That the rates dropped significantly That the borrower walked
• That the borrower was related to someone who got them a better deal
• That the Lender changed their program mid stream Etc, Etc, Etc.!!!

If you locked, the lender lost money. Of course those are good LO reasons, but if Clarion loses our lender relationships due to those reasons, then something’s got to change. The thing that has to change (and will change) is what factors must exist for the LO to lock. Ideally, after Clear to Close, lock it and doc it and get ‘er done. But many LO’s don’t work that way. Well, I am asserting that ultimately there is no home anywhere in the mortgage business for the LO who locks first and apps later. No home for the LO who locks before he’s run AUS, seen the documentation, determined value, and checked with the lender. No one will be able to lock as what will soon be referred to as “old school”. All brokers will have to conform to this mode of thinking.

“But what if rates drop .5% and the lender has a bad re-lock policy?”

Don’t use that lender if they have a horrible re-lock policy. The re-lock policy is a feature of the product they are selling. Don’t buy from them if you don’t like that feature.

“What if their rates are terrific?”

Then use them, but keep your pull through at 80% or be subject to consequences.

And that’s the issue. The brokerage community has never really had to pay the consequences. Now brokers will. Therefore, brokers and LO’s have grown up in the industry with the mindset of the child whose parents constantly threatens and repeats, but never follows through. The shocking turnaround seems unfair. But what really is happening is a movement to align value with value. “For those that help us win, they get value. For those that don’t, they’re gone.”

I’ve spoken with several small to midsize mortgage companies throughout the country. They are being cut off by lenders for several reasons: low volume, high fallout, high touches. Clarion and Catalyst have avoided that fate due to our volume; however, there could come a time that volume won’t even help if we don’t move our pull through and quality into the next era.

This is from a lender this morning that supports my point:

What does a “loan lock” mean? One top agent sent out a note to her staff. “I think as a consumer, or even a loan officer, when we lock a loan, we feel like we are simply “securing” or “holding” that rate for a client. That is only part of it. Once a lock is made, at that moment, the investor is expecting delivery of that loan at the interest rate as part of their portfolio. (In essence, the loan might not be closed, but it is already sold.) If you can’t deliver, or don’t close on time, or you are just simply “trying” to secure a “deal” based on rate, then the investor is going to call your lender and ask, “Where is my loan? Where is my money?” Then your lender might try to “replace” that loan with another loan, or just say to the investor, “Sorry.” You are not just simply holding for you and your client an “Insurance Policy” to try to get that rate, if by some chance you get the loan, you are, in fact, impacting the investors who are trying to make money on those sold loans. It may be hard to miss that “single day” rates are awesome…but, if you are not in Contract, and you don’t have an Appraisal…and you don’t have a true file you can close in 30 days…then DON’T LOCK…UNTIL YOU DO! LOCK when you KNOW you are going to close it. Lock AFTER you have an approval. Don’t lock at multiple Banks. A lock is a promise to deliver!“