If you’re not familiar with the term “wholesale” lending in the mortgage industry, you’re not alone. If you have heard the term, it’s easy to misinterpret its meaning. “Wholesale” might imply universal or overall but that’s not the definition. Wholesale lending plays a crucial part in the mortgage business and I’ll explain why.
First, if you have a wholesale mortgage product it goes to follow you must also have a retail product. That’s certainly true. When a consumer meets with a loan officer and discusses loan programs, rates and terms, it’s a face-to-face conversation. The consumer is getting information on mortgage programs to be used to finance a home. Retail lending is universal. That’s what mortgage companies do, make loans. That’s the retail channel. The wholesale channel works a little differently.
Wholesale lending produces loan programs and rates and uses the services of a mortgage broker to market their programs to the general public on a retail level. For a mortgage company, finding new clients and introducing new loan programs is an expensive task. There’s the simply overhead of originating new business. A lender needs office space and employees. The employees range from someone at the front desk as a receptionist to a loan officer to a processor, underwriter and office manager. And there are others involved, too. That’s where the overhead comes into play.
Wholesale lenders use the services of a mortgage broker to market and promote various loan programs. The mortgage broker establishes a market base and over time has built a database of both referral partners in the real estate industry as well as regular contact with past clients. When using a mortgage broker, wholesale lenders avoid costly overhead and let the mortgage broker assume that financial responsibility. In exchange, the wholesale lender offers lower pricing to the mortgage broker who will then “mark up” the interest rates to a retail level. The difference between what is quoted to the mortgage broker and what is ultimately priced at retail is the broker’s profit. That’s how mortgage brokers get paid. Brokers have access to rates that borrowers don’t have access to.
Another very important reason why wholesale lending is so important is to present different types of loan programs. A mortgage broker doesn’t just shop around for competitive interest rates and terms but finding a loan program that might be unique or to address a specific niche in the industry. All residential mortgage lenders offer conventional loan programs underwritten to either Fannie Mae or Freddie Mac standards. But there are other types of loans that don’t fit that mold. Loans that don’t quite fit the Fannie/Freddie model can be classified as a “portfolio” loan.
A portfolio loan is a program developed by a mortgage lender designed to address a specific market. For example, a loan program that doesn’t require paycheck stubs or W2 forms but addresses income in a different manner. There are programs that cater to those with hard-to-prove income or with depressed credit scores.
An individual mortgage company might have many of these types of programs, but rarely do they have every single one. A mortgage broker however can have marketing agreements with multiple wholesale lenders who cater to a broker. This means not only does the mortgage broker have access to different types of mortgage programs but can also search for the more competitive rates and terms.
Wholesale lending provides ultimate access to various loan programs via the mortgage broker. For example, I have marketing agreements with both local and national wholesale lenders. These wholesale lenders hire customer service representatives who make sales calls to my officer on a regular basis. The purpose of the visits is to introduce new loan programs and to look at a particular scenario and suggest programs that would fit my client. And just as mortgage lenders compete with one another on a retail basis, so too do wholesale lenders who compete for mine, and ultimately yours.