Disintermediation of the broker eliminates the broker, but not the function the broker provides. Brokers provide a viable, self financing, elastic channel of distribution. Disintermediation of the broker transfers the costs of their function to the bank. Often these costs are way higher than a broker’s. Banks need to display their brand with a marble lobby and other branding emblements, where a broker often can run an efficient operation from his or her home. For a bank’s budgeting purposes, fixed costs are divided over forecasted origination volumes and margin pricing policies are set to arrive at expected revenues. Excepted costs are subtracted from expected revenues to arrive at expected profits. The mission of a bank is to make a profit. The volumes or margins need to be higher than a broker’s when fixed costs are higher than a broker’s. To open a retail branch of a bank the costs are considerable. These are sunk costs and are often amortized over a period of years. Regardless of the voodoo economics, the broker in theory has a pricing advantage*. Also, the integration of these new employees and the new channel absorbs considerable resources from the bank. The broker can be nimble, are generally flat in management hierarchy, and can adapt in much shorter periods if they want. The management of a bank’s wholesale operations is often thin on the skills needed to develop effective and efficient retail operations. They have a lot to do to squeeze the broker out. Banks will often use high commissions, pricing and benefits as a mechanism to attract talent and new business; adding to costs and subtracting from revenues. At the end of a start-up period the finance division will find that this model is much more expensive and alternatives will be implemented. This will converge with the ripe opportunity to re-enter wholesale. Banks will begin to chase brokers again but be saddled with the expense of all the retail branches they have opened. Be patient, brokers and center on the Zen of the situation; all of life is on a wave. Roll back your costs and margins. Maintain your focus. Get better at what you do. Generate higher quality, complete loan originations. Increase your activity in the areas that you can actually sell something. There are still billions of dollars in mortgage originations each week. Know your products and systems completely. Maintain the channel’s integrity and only submit loans with a high probability of closing. Offer your clients a quick “no” instead of spinning unlikely loans through the system. Don’t waste time on areas that do not increase your value. It is what it is right now. And it will change. And change again. Evolutions and growth are paramount. Adapt, survive and prosper. We at American Bank Mortgage Group are committed to the wholesale channel with high quality mortgage professional. We are growing exponentially as others are withering or shutting down. *Pricing in theory should be better with a broker as a broker’s cost structure is lower than a bank’s. We know the math, revenue – costs = profits. However, the broker needs to sell to the very banks that are implementing the disintermediation strategy. The banks are raising prices to brokers and simultaneously restricting program access. My question is why do you feed the monster that is trying to eat you? Find other access to liquidity. This is a capitalistic economy (in theory); other liquidity sources recognize this conundrum and are feeding the markets with liquidity. Use those sources. Bio: Tim Bassett is the National Director of Business Development for the wholesale and retail channels of American Bank Mortgage Group. Tim can be reached by email at [email protected].
