The most important question for those looking to get into wholesale

A key to succeeding in the wholesale space is carving out your niche in it, a report by consulting firm Stratmor Group argues. 

During a time of dwindling volumes and profits, the wholesale channel can be appealing because of its typically low fixed costs. But before jumping into this business, mortgage shops and loan officers must figure out what their channel selection and focus will be.

The report divides the wholesale space into three categories: scale lenders, niche lenders and relationship-based lenders. Figuring out the model that best suits a potential entrant is essential, Jim Cameron, a senior partner at Stratmor Group and the author of the report said.

Current players in the first channel are powerhouse lenders such as United Wholesale Mortgage and Rocket Mortgage, which grew their market share to 35% and 11% respectively, from 2020 to 2022. 

Competing with scale lenders is "not for the faint of heart," the Colorado-based consulting firm's report notes, and will require a "tremendous amount of capital and the ability and willingness to go big." 

In the past year, loanDepot, Home Point, Union Bank and Finance of America have decided to bow out of this space because of price-based competition.

Ample resources are needed to build out the sales, operations and technology infrastructure that can compete with current players. This is a slow-burn project, which "will take years, not months, to develop," Cameron wrote in his report. However, acquisitions can easily jumpstart such an initiative, the report said, pointing to The Loan Store's recent purchase of Home Point's wholesale business as an example.

On the other hand, mortgage professionals could opt to develop a niche channel that offers products with unique underwriting and investor requirements, like non-QM players Angel Oak and Deephaven. 

"The wholesale channel is ideal for niche lenders because they can cast a wide net over thousands of brokers who can originate the product as the need arises, and work with a lender who has the expertise to efficiently underwrite and close the loan," Cameron added.

Last but not least is the relationship-based option. The specialty involves long-term partnerships with counterparties that broker loans to them, such as small community banks and credit unions. This "could be a nice supplemental channel for an existing retail lender," Cameron noted.

The author of the report posits that LOs are most likely to make the leap into wholesale lending compared to mortgage shops. "After all, they are doing much the same thing — beating the bushes to generate business, whether they are employed by a retail lender or a mortgage broker," he said.

All in all, the wholesale channel's share has increased in the past decade. From 2011 to 2017, the wholesale channel share was in the 15% range and now makes up about 20%, according to data from Inside Mortgage Finance.

Technology companies have taken notice of the trend and have started to push out specific wholesale-related technology. One such company is OptifiNow, a software company, which built out a CRM sales management and marketing automation software specifically for players in the wholesale space and those that want to enter and quickly scale their outreach.

"We built OptifiNow TPO because wholesale and TPO lenders do not have many choices for CRM," said John McGee, president of OptifiNow. "There are quite a few CRMs designed for retail loan officers, but there are too many limitations in those CRMs to make it work for wholesale account executives."