By Adam Thorpe, President & COO
Many have asked me about the secret to Castle & Cooke Mortgage’s (NMLS #1251) success. Indeed, the company is experiencing tremendous growth in a very challenging and complex industry. My response to these inquiries is that I am fortunate to lead an amazing company that is focused on the right things. We have a remarkable team that is committed to Castle & Cooke Mortgage’s core values of honesty, integrity, transparency and hard work. The company’s executives and managers are fully committed to providing Castle & Cooke Mortgage’s producers with unparalleled resources and support. The company is also fortunate to be large enough and have sufficient financial resources and backing to properly address the current complexities of the mortgage industry, including the ever-changing legal and regulatory requirements.
Unfortunately, others in the mortgage industry aren’t as prosperous. Small, independent mortgage companies face significant obstacles that are almost impossible to overcome. These challenges include, but are certainly not limited to, continually evolving legal and regulatory requirements and skyrocketing compliance costs, increasing net worth requirements, availability of warehouse lines on reasonable terms, burdensome loan level representations and warranties demanded by aggregators, lack of access to competitive pricing and products, and capital constraints that prevent owners from providing the support loan originators demand.
Given these challenges, it makes more sense now than ever for these small companies to consider aligning with a larger direct lender.
Industry Complexity & Compliance
Since the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed into law in 2010 and the Consumer Financial Protection Bureau (CFPB) was created in 2011, there have been wide sweeping changes to the laws, regulations and oversight in the mortgage industry. All mortgage companies have had to contend with these changes and the process to originate a fully compliant mortgage loan is significantly more complex today than it was just five years ago.
The introduction of TILA-RESPA Integrated Disclosure (TRID) in October 2015 is one such example, with a striking correlation between increased loan origination costs in Q4 2015 resulting from the new rule. The looming changes to the data collection and reporting under the Home Mortgage Disclosure Act (HMDA) is another example of new legal requirements that will drive added complexity in the market and certainly challenge all mortgage companies.
To address the complexity of the mortgage industry’s regulatory landscape, most lenders have added multiple new positions—and even entire departments. The costs associated with the new positions and departments necessary to keep up with the regulatory changes are staggering. In fact, according to the MBA, the average cost of originating a loan has increased nearly 75% in the last seven years, much of which is attributed to new regulation.
Unfortunately, smaller lenders typically cannot afford this additional expense and delegating compliance-based matters to employees without the requisite training and experience can be dangerous. At the same time, smaller lenders cannot afford not to invest in compliance. Aligning with a lender that has the appropriate compliance structure saves the time and risk involved in trying to manage the process independently, or the cost associated with outsourcing the service.
As owners and operators of small mortgage companies know very well, securing and maintaining warehouse lines to fund mortgages can also present unique challenges. Over the past several years, many small lenders have seen their net worth requirements increase. Additionally, when dealing with smaller mortgage companies, warehouse lenders will almost always require that the owner enter into a personal guaranty. In the case of an unforeseen challenge to the business, such a personal guaranty can prove to be financially devastating.
Aligning with a larger direct lender shifts the burden of maintaining warehouse lines and compliance with financial covenants to the large lender. Large lenders like Castle & Cooke Mortgage have the financial standing necessary to meet these obligations. After joining a larger company, the producers can focus on production without concerns for such direct personal exposure and liability.
Selling Loans on a Correspondent Basis
Selling loans on a correspondent basis to aggregators can also be very challenging for small companies. The required contracts will invariably contain onerous provisions, including loan level representations and warranties and personal guaranties. These burdensome provisions can survive indefinitely, which means a lender can face a repurchase demand even a decade after selling a loan. Aggregators also maintain numerous overlays, which can change frequently and must be addressed with each loan. Naturally, any miss can trigger a repurchase.
Aligning with a larger direct lender that can sell without unnecessary overlays shifts the burden of maintaining correspondent relationships. After joining a larger lender, the owner no longer has the risk of repurchase on future loans.
When smaller lenders merge with a larger, more established lender, they are able to take advantage of a more robust support structure. Operationally, lenders that handle more aspects of the loan process in-house tend to have more streamlined workflows and faster turn times. Without having to outsource activities like underwriting to third parties, these lenders are able to maintain greater control over the loan process.
Having the support of an executive team and dedicated staff that is attentive to the needs of managers and loan originators is an additional benefit not enjoyed by many small lenders. Further, the financial backing and stability offered by a larger lender helps alleviate the burden of liability that may otherwise fall solely on an independent owner.
Products, Pricing & Servicing
One of the greatest advantages of aligning specifically with a direct lender is their access to the secondary markets and more competitive products and pricing. This allows loan originators to avoid unnecessary overlays and offer more loan programs at better prices to a more diverse population of homebuyers.
By aligning with a lender that retains the servicing rights to a substantial number of the loans it originates, loan officers are able to maintain contact with their clients over the life of their loans, giving them the ability to market refinancing opportunities to them to secure future business.
Direct lenders may still maintain correspondent relationships, offering select brokered products to give their loan originators access to unique niche programs. This means that smaller correspondent lenders may not have to give up access to the programs with which they are familiar, giving them the best of both worlds.
Having a sound marketing strategy is critical to remaining competitive and fostering growth. Having access to high-quality marketing services is invaluable, as seemingly simple things like the quality of a website can impact a business’s perceived credibility.
Solid marketing support also includes the creation of the collateral that loan originators use to interest, educate and communicate with their clients on a daily basis. Unfortunately for smaller lenders, high quality marketing can be incredibly time-consuming if attempted in-house and very expensive if outsourced. By aligning with a larger lender with a dedicated marketing team, they can leverage existing resources, saving money and freeing up time to focus on closing more business.
In addition to marketing and compliance, there are a slew of other important business functions for which owners of smaller mortgage companies must account. This includes human resources, accounting and basic administrative duties, just to name a few. It is difficult to address these tasks with a limited staff. Moreover, the time spent trying to manage all of these processes takes time away from closing loans, ultimately reducing volume.
Clearly, the control afforded by independence comes at a literal price. After joining a larger company, producers spend less time on administrative tasks and more time generating and maintaining leads to close more business.
Having Confidence in the Transition
The key to success for owners of smaller mortgage companies lies in finding a larger lender whose mission, values and culture reflect their own ideals, and whose products and support structure can truly help them increase their production levels and those of their team.
It is natural to feel some apprehension when faced with the thought of relinquishing control of a business that took time, effort and sacrifice to build. As such, it is essential that larger lenders demonstrate their honesty and sincerity to build trust and ease the transition. With clear expectations from the outset, both parties can be confident in their mutual future prosperity.
Interested in learning more about what Castle & Cooke Mortgage can do to help you grow your business? Contact me at 801-461-7140 or firstname.lastname@example.org.