Jackson Jambalaya

The mortgage industry website "The Implode-O-Meter" reported Flowood-based Realty Mortgage shut down its wholesale lending operation last week:
"Realty Mortgage Corp. based out of Flowood, MS has shutdown its wholesale channel. The official announcement released 2009-01-22 was brief: "Due to current market conditions Realty Mortgage will no longer accept locks through the wholesale channel. This is effective immediately." Implode-O-Meter Story, Discussion Thread on Forum

Realty Mortgage consisted of retail and wholesale lending operations in several states. The retail division underwrites mortgages for borrowers who "come in the door", deal with Realty Mortgage loan officers, and submit loan applications and supporting documentation to Realty Mortgage. Realty Mortgage underwrote the file, closed the mortgage with its own funds, and later sold the loan to larger financial institutions such as Chase, Citi, and Wells Fargo (These banks are used as examples, not as statements of a relationship between them and RM.) The retail operation is doing well and shows no signs of slowing down as several sources have told JJ (As discussed later, this part of Realty Mortgage will probably thrive and get even stronger as the mortgage industry continues to change.).

However, it is the wholesale lending side of Realty that crashed last week as the market for buying such loans has dried up in the last few weeks. In a wholesale lending operation, a lender such as Realty acts as a lender for other mortgage companies. RM never deals directly with the borrower in wholesale as it is the mortgage company that takes the loan application, processes the file, and submits it to RM for underwriting. RM then approves the loan and advances the funds at closing, using lines of credit it has with financial institutions (in the trade they are called "a warehouse line". ) Operations such as Realty will then bundle up the loans they have on their credit lines and sell them in a package to banks such as the ones mentioned earlier (This is what is called the "secondary market" in the mortgage industry). Most so-called lenders operate in this fashion and are not banks, but are underwriters and sellers of mortgages. Such practices are what have allowed mortgage brokers were able to operate for the last twenty years.

The secondary market for mortgage sold by these lenders has contracted over the last two weeks as purchasers such as Chase and Citi have notified lenders they will no longer purchase mortgages if originated from other mortgage companies. They have also made it clear in their announcements they will continue to purchase mortgages if originated through retail channels, i.e. meaning if a lender such as Realty originates a mortgage directly from a borrower. To a lender such as Realty, this was a curtain call for its funding loans for mortgage brokers as there were suddenly few, if any, buyers for its "paper".

The mortgage industry is currently suffering from another round of implosions: wholesale lenders who underwrote mortgages funneled to them by local mortgage brokers and then sold on the secondary market are no longer finding buyers for their paper. As their credit lines fill up, they are no longer able to fund mortgages and are exiting the mortgage industry, leaving mortgage brokers scrambling to find other lenders. Speculation runs rampant on industry industry message boards companies such as Wells Fargo will exit this market as well, leaving few sources available to such lenders while the Wells' and Chases's expand their retail operations (For more reading on this subject, here are two excellent articles: Citi makes changes, Loan performance an issue).

It will not be surprising (no inside info here, just an educated guess) if Realty absorbs mortgage brokers into its retail operation, converting them to Realty Mortgage branches throughout Mississippi and other states as it becomes harder for them to find lenders who will deal with mortgage brokers. The future of the industry will probably see the consumer going to the retail offices of Countrywide, Chase, and lenders such as Realty Mortgage when purchasing a home or refinancing his mortgage.