Michael Fontaine of Plaza Home Mortgage on the TPO Market
By MBA Insights Staff
March 11, 2019
Michael Fontaine is Chief Operating Officer & Chief Financial Officer of Plaza Home Mortgage, San Diego.
MBA INSIGHTS: What's the outlook for the third-party origination market this year?
MICHAEL FONTAINE, PLAZA HOME MORTGAGE: From our perspective, we believe the TPO market, at least on the wholesale side, will grow as a percentage of the overall market this year. Even though the overall market is predicted to shrink this year, the outlook for the TPO market is not quite as bleak. It will be a little larger piece of a smaller pie. So if TPO is 10 to 11 percent today, it wouldn't be surprising to see it grow to 12 or even 12.5 percent by the end of this year. Not a massive gain, but if you think about it, that's approximately a 10 percent increase in volume or, another way of looking at it, a 10 percent increase in opportunity. Most of the expansion will come in wholesale; correspondent lending for the most part will probably track the overall market this year.
One of the trends that's driving this growth is the return of the mortgage broker. We're seeing loan officers leave retail; and former brokers, who moved to the retail side after the mortgage crisis, come back into the sector. Now that the market has shifted to purchase, wholesale gives these more entrepreneurial LOs more products and tools to help their customers. Also, it's a little easier now to become a broker than it was several years ago.
Correspondent lenders are also re-thinking their strategies in this smaller, more price competitive market. You're beginning to see some lenders that may have been selling direct to the agencies or to some of the larger aggregators, shifting their business to new investors that can execute more quickly and move loans off their balance sheets faster. So our ability to consistently execute is creating opportunities for us.
INSIGHTS: We've already seen some announcements of multi-channel lenders pulling back and focusing on retail. Do you expect to see more of this in 2019?
FONTAINE: Yes. I think we'll continue to see firms exiting the TPO channels. These channels tend to have very thin margins, so the opportunity to pick up additional retail volume can be perceived as a better opportunity. Also, we saw some primarily retail lenders try to get into wholesale when volume started falling off a couple years ago. Many of them are now realizing that that's not their core competency, and they seem to be refocusing on retail.
To succeed as a TPO lender, you really have to focus on managing risk and understanding the needs of your clients. You have to be set up to handle all the checking and cross-checking from all the parties involved in the transaction, re-verifying the customer data and always keeping in mind that it's not coming from your loan officer, or employee, but from someone else's. Likewise, you're dealing with a lot of title companies and closing agents that you don't necessarily work with on a daily basis. So you have to make sure you're properly vetting everyone and everything as you go along to make sure that you're providing a quality, compliant product. Making sure you're compliant is still a significant challenge, particularly for lenders like Plaza, who do business in all 50 states.
INSIGHTS: As the market tightens, how are you positioning Plaza to be more competitive?
FONTAINE: First and foremost, we're providing our clients with the array of products they need to truly serve their borrowers. Over the last few years, we have also focused on improving our technology, enhancing our value proposition to correspondents, and stepping up our marketing.
On the technology side, we launched a new loan origination system last year, making it easier to do business with us. Since then, we've been adding new solutions, like our online initial disclosures, that the broker can provide directly to their customers in minutes.
On the correspondent side, our proprietary Certified Loan Program protects lenders against buy-back risk, due to loan defects. This gives correspondents another reason to do business with us beyond just the best execution price at the end of the day.
In terms of marketing, we're trying to make sure that mortgage brokers understand how we can help them succeed. Our basic message to brokers: Because we have the best and the widest range of products available, you can provide the best loan product for your customers. At the end of the day, it's the ability to find the right product fit for the borrower, even more than price, that drives customer satisfaction and leads to referrals and repeat business.
Our correspondent messaging reminds clients that they can get an extra layer of protection against buy backs and that unlike the giant aggregators we are agile enough to close deals quickly.
INSIGHTS: Some observers are predicting mega lenders and fintech players will make the mortgage broker obsolete. Obviously, you don't believe this. But how can they compete?
FONTAINE: Certainly these new players are getting a lot of attention, and they probably are taking some share in the refinance side of the business. But in a purchase transaction, most borrowers are not comfortable dealing online or over the phone with somebody they've never met. Borrowers are certainly shopping over the internet and they'll talk to people over the phone at the call centers, but, at some point, they want to sit down with a professional. Typically, most borrowers buy only a few houses in their lifetime. It's such a large transaction, they need to be comfortable with the parties involved. This isn't the fintech model.
Also, local realtors want to get comfortable with the loan officers that they're dealing with to make sure that their transactions will close. From what we're hearing in the market, Realtors are getting a little leery of the pre-quals that fintechs are generating. Remember a pre-qual is only as good as the data that gets entered. So whether it's a fintech that gives you an instant answer within two minutes of entering a few pieces of data or it's a preliminary "Hey, I uploaded my 1003," you have to be careful that the data is supportable. It's not that the borrower is intentionally omitting information, but a lot of times, they forget about that 30-day late they had six months ago, or the job change, or the overtime pay that isn't recurring, or that their parents are helping with the down payment.
Those five-or-six-answer, online pre-quals don't really give you the depth that you need to underwrite a transaction. So while they are a good starting point, they're certainly not the final answer all the time for the majority of borrowers.
Also, not everyone qualifies for the product they start out applying for. While they may have thought that they could qualify for a vanilla, agency 30-year loan, maybe they don't. On the other hand, they may qualify for one of the other products that we might offer, whether it's an FHA loan or a USDA loan, or a renovation loan, or maybe even a low down payment loan.
INSIGHTS: Do you have concerns about the current regulatory environment for TPO lending?
FONTAINE: We're focused on providing quality, compliant loan products nationwide. The shifting regulatory landscape is making this more challenging. While federal regulators have recently been less active in terms of new rules and their approach to enforcement, most observers agree that activism at the state level has increased.
Our concern is that this could lead to a lack of clarity and consistency. Since we're a lender that's regulated by not only the federal level, but licensed in all 50 states, we're dealing with potentially 50 different interpretations of what the lending laws should be. Federal, state and local jurisdictions unfortunately aren't always consistent.
INSIGHTS: A lot of attention has been focused on how technology is improving the customer experience in retail lending. What kind of technology will be important for TPO lenders, like Plaza, and your clients (i.e., banks and mortgage brokers)?
FONTAINE: In the TPO market, the benefits of technology basically come down to: being easy to do business with; keeping clients and other parties in the loop, so they know where things stand in the transaction; and being able to make faster decisions.
Mortgage brokers want connectivity that gets the data to the lender as painlessly as possible. This means having seamless integrations between their front-end point-of-sale and loan officers and our systems. It also means being able to have access to the right data, accepting documents digitally, and incorporating automation that alleviates the need to reenter data.
In addition, brokers, LOs and other parties want to be kept well-informed during the whole underwriting and closing process, so there are no surprises. This means pushing information to them about where the loan stands in the process and what is outstanding. That way they can keep their borrowers informed in a wholesale transaction or they can better manage their balance sheet in the case of a correspondent transaction.
Turn times are always important for both the broker and the correspondent, and technology can accelerate them.
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