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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2005

Two heads beat one when making banker transition

It’s no secret that many brokers’ heads have turned toward the prospect of becoming a mortgage banker. The allure of mortgage banking offers great temptation, especially for brokers who want to extend the success they have had in the past four or five years. Brokers increasingly view themselves at a crossroads — choosing either to stick with the profession that has rewarded them or to build upon their skills to reach new achievement levels in a new role. The risks inherent in the broker-banker transition contribute heavily to their decisions, as does a healthy respect for the unknown that some call fear but others know as prudence.

Prudence — utilizing knowledge and experience with common sense and insight — is an ideal watchword for brokers contemplating their futures. A possible more-prudent alternative to becoming a banker is to partner with an already-established mortgage bank. Branch partners potentially can realize a 25- to 35-percent profit increase from aligning with a corporate mortgage bank. They also avoid the risks of building a mortgage bank from the ground up.

Why change?

The three motivating factors that drive brokers’ desire to transition to mortgage banking are increased control, credibility and profitability.

Mortgage banks have maximum control over loans and business processes. They choose the types of loans to offer borrowers and also make underwriting decisions without referring to third parties.

Mortgage banks also are not required to disclose yield-spread premiums or include back-end fees in the set price. Brokers must disclose yield-spread premiums on the good-faith estimate and broker-fee agreement at closing, which can weigh heavily on a borrower’s decision to move forward with the loan. As a result, the broker might have to restructure the loan or lose it altogether. The premium also counts toward any caps that state banking departments have placed on the maximum fees charged to borrowers. For example, in New York, the premium is incorporated into Part 41 of State of New York Banking Department regulations.

Mortgage banks enjoy increased name credibility within the industry, which reaches directly to the end target — the borrower. When partnering, brokers and bankers work closely with business partners in the industry and rely on these relationships for referrals and new customers. The broker-banker transition can boost credibility with Realtors, financial planners, attorneys, accountants and other business partners.

Although control and credibility impact the bottom line, the ability to profit from loans on the secondary market can be the No. 1 factor motivating a business change. Strategic access to selling on the secondary market can benefit the mortgage bank and its borrowers. Moreover, a lender can increase profits quickly by selling loans on the secondary market.

Realize risks of switching

Liquidity, willingness to invest time, employing experienced personnel, installing proper systems and implementing sophisticated technology set the broker-banker transition in motion. Converting to mortgage banking is achievable when these five key points are in place. Then, it is time to analyze potential risks.

First, realize that mortgage banks assume all loan liabilities and responsibilities. For example: Underwriting decisions, which stem directly from credit policies, drive loan sales on the secondary market. If credit and underwriting policies are not deployed correctly, a mortgage bank might not be able to sell a specific loan for profit and could be forced to sell it at a discount, incurring a net loss. If a mortgage banker underwrites a file incorrectly and the file has a first-payment default, the banker might have to purchase the loan back from the investor. This can devastate the bank’s liquidity, which can impact its ability to meet daily operational cash expenses. Interest-rate risks can be costly, too, and mortgage bankers must invest in hedging strategies and advisers to mitigate these risks.

Additionally, mortgage banks must meet state regulations. Multi-state providers not only follow the regulations of Home Ownership and Equity Protection Act Section 32 but also must adhere to the laws of individual states. This requires bankers to have a deeper knowledge of compliance than do brokers. Mortgage banks also require varying quantities of operational staff and specialized personnel in areas such as secondary marketing, post-closing, underwriting, accounting and human resources. Building an experienced team in each of these areas can be cost-prohibitive.

Too many risks? Try partnering

In some cases, brokers might not become model bankers on their own. As an alternative, those with the drive but not the capital, staff, policies or technology to become mortgage bankers can choose to partner with an already-established mortgage bank.

Creating strategic partnerships with existing mortgage banks enables brokers to become bankers without the risks of launching an individual establishment. In addition to the motivating factors above, brokers discover other reasons why this is the right choice for their business model.

By partnering with a banker, brokers can leverage the bank’s established systems, technology, personnel, operational staff and business partnerships, which can increase their speed significantly in the market. The application process for a broker to become a branch banker takes about 30 to 60 days, while the waiting period for brokers to become individual mortgage bankers can take as long as a year and a half.

A branch partner also can focus on growing an individual branch, as a corporate mortgage bank handles all back-office functions. Branch partners can count on the corporate bank to control the day-to-day operations required for closing loans and selling them on the secondary market, too. The branch reaps the benefits.

Branch partners can utilize the bank’s balance sheet to bolster their warehouse lines, which typically would require large amounts of capital for individuals to secure. Partners can also tap into the bank’s marketing and advertising resources to build sales campaigns for the branch.

However, partnering with a mortgage bank is not always a walk in the park. When brokers partner with a corporate bank, they lose some freedom and control that comes with operating on their own. As a division of a corporation, they can keep their individual identities and branding. But they might have to exchange certain policies and procedures for new ones.

Choose the right partner

Brokers’ success as branch partners only is as strong as their mortgage-bank relationships. Therefore, it is in their best interest to investigate banks thoroughly.

It is important to research companies to ensure their financial stability and industry reputation. The Better Business Bureau and state banking departments have records of complaints filed against banking operations — as well as against other types of businesses. Brokers can locate them quickly for reference. As brokers give up their broker licenses to become branch partners, it’s important for them to be 100-percent sure that they are making the right choice and that the bank will support them financially and ethically.

A solid mortgage bank provides its branch partner with the means for success. This includes infrastructures to support staffing, marketing and lead-generation systems, sales-training tools and educational seminars. The ideal mortgage bank has strong quality-control and compliance departments, as well as an experienced operational staff that can provide fast turnaround. It also should have sophisticated technology to support multiple loan products and processes. Furthermore, the bank’s and partner’s values should align.

After gathering information, potential branch partners should review corporate policies and procedures to learn how the company runs. By digging even deeper, brokers can discern true-life examples through interviewing current branch partners and senior executives.

Make the decision

It would be easy to say that one option is inherently better than another. Giving up a broker license is tantamount to giving up part of yourself and should not be undertaken lightly. The decision weighs entirely upon brokers’ commitment to the mortgage-banker transition and the ability to acquire the tools needed to make the conversion.

Although each broker case is unique and will have different outcomes, all call for serious research on risks vs. benefits. Even if everything looks perfect on paper, there always is a risk when making career transitions. However, if planned and implemented thoughtfully, the transition can be the best move for a broker — and it can be accomplished either as an individual or with support from an established mortgage bank. Partnering with a mortgage bank can be as successful as building a bank individually, and it will bring the broker to market more quickly. 


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