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Northpointe Bank, a regional bank headquartered in Michigan, has announced that they are closing their correspondent lending operations in April of 2023, and will shift their focus to retail lending, mortgage warehouse lending and specialty loan servicing. This decision was made after the financial institution experienced a 25% reduction in new originations in 2022. According to digital mortgage data platform Modex, Northpointe Bank dropped from $7.29 billion in originations in 2021 to $5.49 billion in 2022. 

Unfortunately, this news is old hat for those in the Third-Party Origination (TPO) space. In the space of 12 months, at least a dozen large lenders have exited the TPO channel, both in wholesale and correspondent:

• Guaranteed Rate- Purchased Stearns Wholesale Lending in 2021, and shuttered the operations in January 2022
• Homepoint Financial- Correspondent channel was acquired by Planet Home Lending in April 2022, wholesale channel still active
• LoanDepot- Exited wholesale in August 2022
• Mountain West Financial- Exited wholesale in August 2022
• Celebrity Home Loans- Exited TPO entirely in August 2022
• Amerisave- Exited wholesale in September 2022
• AnnieMac- Exited wholesale and private label solutions channels in September 2022
• Finance of America- Exited forward wholesale mortgage operations in October 2022 to focus purely on reverse mortgage channel
• MUFG Union Bank- Acquired by US Bank in December 2022, and immediately shut down
• Wells Fargo- Exited correspondent channel in January 2023, continues to sell off their servicing

These closures do not include a slew of Non-QM lenders who have shuttered their doors entirely over the last year, such as Sprout Mortgage, Athas Capital, and others. 

The real estate market continues to experience unprecedented struggles, made worse by unchecked inflation, increased interest rates and a consistent lack of affordable housing inventory. It is not uncommon for lenders to pull back operations in lines of business that may be deemed “risky” in a volatile market, but the current market we are in is unlike any that most mortgage professionals have experienced. 

It is not a shock to see Non-QM lenders fall back as interest rates rise and the uncertainty of home values remains ever-present. This business line continues to suffer from a lack of fungible liquidity, so the fear of being stuck with billions in overvalued servicing is on the forefront of every Non-QM CEO’s mind. 

What is a shock is that banks and non-banks are leaving TPO in droves, focusing purely on retail originations and other lines of business. Many of these lenders have invested millions (if not more) on tech to support the TPO channel during the peak of the pandemic, and to abandon the channel altogether seems like a bit of a knee-jerk reaction to an unstable market. As layoffs in real estate continue to plague the industry, especially in the fintech and multi-channel space, it is expected that more lenders will pull back from the TPO space. 

As access to mortgage options continues to shrink, who stands to lose the most in the transaction? The consumer does. Simply put, diminished liquidity in the mortgage market equates to increased rates, tightened credit policies and lack of affordable housing options. The lenders who opt to stay in the game often increase their rates to offset the rising costs of originating a loan and to offset the inherent risk assumed from an increase in foreclosure activity. 

What Happens to Mortgage Brokers?

As TPO originations continue to decline, the one segment of loan officers who will be the most greatly affected by lack of delivery options is the mortgage broker. Mortgage brokers aren’t new but have experienced a massive resurgence in popularity as more loan officers seek to have better control of their operations by opening their own broker shops. To reduce overhead, many decide to stay purely as a broker- they originate the loans then send them to a wholesale lender to complete the entire process. This allows brokers to have access to a wide variety of loan products at the best rates available in the industry, without having to carry overhead that comes with hiring an in-house underwriter, maintaining a warehouse line, or hiring a secondary marketing manager. 

Having access to a multitude of wholesale lenders equips brokers with powerful sales tools to help their borrowers get into the best possible loan for their individual situations. When those lenders disappear, brokers lose those tools, and their borrowers suffer. Not only that, but the few wholesale lenders who remain are aware they are in an unchecked position to charge whatever they want to get the business. Again, this only hurts the consumer and paralyzes the market. 

A Ripple Effect in the Real Estate Ecosystem

When mortgage lenders decide to reduce their offerings or leave the space altogether, the effects can be felt far beyond just refinances. Real estate agents witness firsthand what happens where there are fewer product options and higher interest rates. This pain can be felt even more in rural areas, where lack of different mortgage options pushes first time home buyers out of the market completely. 

Chanel Crumbaugh, a broker associate with River City Real Estate in Grand Junction, Colorado, has been in the industry for several years, and is currently experiencing the effects of higher interest rates and lack of product options in her business, especially with first time home buyers. 

“For many, right now, home ownership is no longer financially feasible.”

-Chanel Crumbaugh

“Since mortgage rates started increasing in January of 2022,  the rate of housing sales has continued to fall in Mesa County, Colorado”, she states. “ Comparing January 2022 to January 2023, Mesa County is down 35% in the number of home sales and down 2% in the median sale price, which now sits around $366,000.”  As she describes, the decrease in affordable housing is forcing out her first time home buyers. 

“For many, right now, home ownership is no longer financially feasible. If interest rates continue to increase the number of home sales will likely continue to decrease, and sellers may have a harder and longer time selling their homes. For many first timers looking to buy this may push them out of homeownership entirely until rates start to decline or housing prices drop significantly.”

While the increase in interest rates can be attributed to current economic conditions, this can be further compounded by lack of lenders offering services, which has a negative impact on overall mortgage liquidity. In addition, Real estate agents who are used to doing business with local mortgage brokers may not be seeing as much referral business from those relationships as the brokers are no longer price/product leaders in their local markets. 

Russ Fitzpatrick is a 40-year real estate brokerage veteran who now manages 80,000 real estate agent members of AnnieMac Worx. As a seasoned real estate professional, he has seen many cycles and has firsthand experience on how a contraction in available mortgage options can damage the real estate ecosystem. 

As he stated, “Third Party Origination is the conduit to a competitive mortgage lending market. Fewer originators brokering means less competition vying for a borrower’s business. Imagine a world where there are only a few places to take out a mortgage.” Normally, when agents are no longer able to rely on the larger independent mortgage and wholesale lenders (through the broker channel) for referrals, they would pivot to their local community banks and credit unions. Unfortunately, however, many of the smaller financial institutions do not have access to government lending offerings (such as FHA, VA and USDA) or choose not to focus on mortgage at all. 

Another unintended side effect of TPO operators closing down is the loss of real estate agents in the marketplace, as they now have to look for other sources of income to survive. “Realtors are heading back to side hustles,” Russ explains. “The top Real Estate Agents in the country survive during difficult times but average and emerging associates are scrambling for income from UBER, DoorDash and bartending”.

A Path Forward for TPO

So, what needs to happen for lenders to return to the TPO channel and to feel more comfortable with originating? It will require providing lenders a safeguard and access to liquidity. This can be achieved by giving lenders access to funding facilities such as through Ginnie Mae or the Federal Home Loan Banks network. More Independent Mortgage Bankers would feel comfortable staying in the TPO space if they knew they could fund loans without tying up all their liquidity or having to retain servicing. As more lenders gain access to co-issue facilities through the agencies (Fannie and Freddie), they can fund loans directly while simultaneously selling servicing, thereby freeing up liquidity and transferring risk at the same time. 

“2023 is becoming the year of rebirth for America’s REALTOR® and Mortgage Originators.”

-Russ Fitzpatrick

As more banks exit the mortgage space completely, non-banks are uniquely positioned to capture more market share and provide quality products and pricing to their partners. They just need to know that they won’t be left hanging when the chips are down. Diversity in the marketplace is a win-win for everyone, and it would benefit those in charge to come up with a viable solution that will allow lenders to navigate the ebbs and flows without fear of drowning. 

One final thought that Russ shared brings a glimmer of hope for the future: “2023 is becoming the year of rebirth for America’s REALTOR® and Mortgage Originators. It’s as if the industry is being forced to shed its skin in preparation for the future operating environment to reveal itself”

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