New mortgage shop in a 6.25 percent market: chase purchase volume or build the investor and private book first?

Question

The first eighteen months of a new brokerage split into two paths that look genuinely different, not just in marketing but in what the P&L looks like. Conventional purchase lane. A typical file runs around a $380,000 loan. Compensation in the range of 1.5 to 2 percent depending on structure, so call it $5,700 to $7,600 gross per closing, and the files are standardized enough that a processor can carry most of the work. Referral sources are agents, and there are a finite number of good ones who are already covered. The problem is that purchase volume is soft with the 30-year near 6.25 and refi close to dead, so a new shop is fighting for share of a shrunken pool against people with ten years of agent relationships. The cycle turns and this lane comes roaring back, but nobody can put a date on that. Investor and private lane. Bridge, DSCR, fix and flip, small balance commercial. Loan sizes often run smaller, $150,000 to $400,000, and points can run higher, though a meaningful share of files die and dead files pay nothing. The work per file is much heavier and much less delegable, because the job is solving structure rather than filling in a form. What comes back in exchange is repeat borrowers. One decent flipper doing six a year is six files, and he calls the broker rather than the other way round. Private credit has been growing fast enough that the lender bench keeps expanding, and knowing that bench cold is a real asset that a rate cycle doesn't erase. The case against starting in the investor lane is that it's slow to build, the borrowers are demanding, and a year can go into learning a lender roster while competitors bank purchase commissions. The case against starting conventional is that two years go into building a book that a direct-to-consumer platform can undercut on a commodity 30-year fixed. There's no clean answer here. Input from people who've been on the borrower side of both is especially useful.

kevin_lombard · Answer

I want the basic thing spelled out here. In the conventional lane, who pays the broker, the borrower or the lender? And in the private lane are the points always paid by the borrower at closing? I ask because if the money comes from different places, the incentive to steer a borrower toward one product over another seems very different in the two lanes.

monica_tran3 · Answer

You are arguing about the wrong variable. Both lanes live or die on where the files come from. Conventional means you are renting attention from agents who can drop you the day someone buys them a better lunch. Investor files mean the borrower himself is the source, and he stays yours as long as you keep closing. That is the real asymmetry. One book is a list of gatekeepers and the other is a list of customers. Build the one you own. It is slower and the first year is thin, and a referral book built on somebody else's goodwill is the kind that disappears in a quarter.

Rena Guide · Answer

Some plain definitions first, since the two lanes use different vocabulary.

Conventional lending means loans that are not insured or guaranteed by a government agency. Most conventional loans conform to the standards set by Fannie Mae and Freddie Mac, which is what makes them saleable to the agencies; conventional loans outside those limits or guidelines are jumbo or non-QM. Government programs like FHA, VA and USDA are the separate government lane. Both lanes are heavily standardized, which is why a processor can handle most of a file, and in both the borrower qualifies mainly on personal income and credit.

The private and investor lane covers lenders using their own capital or fund capital. DSCR stands for debt service coverage ratio, and a DSCR loan qualifies the property's rent against the loan payment rather than the borrower's paycheck. Bridge and fix-and-flip loans are short term, usually with interest-only payments and a plan to sell or refinance at the end.

On @kevin_lombard's question, broker compensation on residential mortgages can be paid by the borrower at closing or by the lender, and the rules governing how it is set and disclosed differ by loan type. Private and business-purpose lending sits under a different regime again. Licensing requirements also vary by state, and which loans require a mortgage originator license depends on your state and on whether the loan is consumer or business purpose. Confirm both with your state regulator and a licensed compliance professional before you build a business plan around either lane.

One thing that argues for @mikeoconnell7's second option regardless of the vote here. Repeat borrowers reduce marketing cost per file, and an active investor generates files in any rate environment. That doesn't make the answer obvious, since the first year of income is genuinely thinner.

ryanmck27 · Answer

Mid-licensing right now and the exam material is almost entirely consumer conventional, which tells you where the regulated volume is. Nothing in it prepared me for reading a bridge term sheet.

I'm voting for the split, mostly because I need something paying the rent while I learn the private bench, and the private bench takes real time. @monica_tran3 is right that the investor book is the one you own. It just doesn't feed you in month four.

New mortgage shop in a 6.25 percent market: chase purchase volume or build the investor and private book first?

4 replies