Wholesale lenders sold home loans in mass quantities.
A wholesale mortgage business sells home loans in large quantities through outside brokers. The business can function as a division of a large bank or serve as a stand-alone operation. Wholesale brokers are privy to the latest products and pricing and generally work for a number of different lenders. While this type of lending made the mortgage industry more competitive, it also led to its downfall. In wake of the subprime mortgage collapse from 2007 and 2009, banks began closing their wholesale mortgage divisions and focused on selling mortgages in-house.
History
Historically, banks sold mortgages to customers through their own loan officers. But as demand grew in the late 1990s, large mortgage companies emerged in the marketplace. These entities were wholesale lenders designed to increase efficiency and survive on selling large numbers of mortgages quickly. Many banks also set up their own wholesale mortgage divisions. By 2005, wholesale operations were responsible for 56 percent of all loans that were considered "prime," according to a study conducted by the Joint Center for Housing Studies of Harvard University. These lenders also accounted for 78 percent of non-prime loans that year. (Prime loans are sold to credit-worthy consumers while subprime loans are bought by borrowers with low credit scores.)
Financing
It was simple for banks to jump into the wholesale lending industry because they had the financial shoulders to borrow large sums of money at a low interest rate. Those banks sold the money to outside brokers, who in turn sold mortgages to the masses. With numerous banks competing for consumer mortgages, the wholesale business made the entire industry more competitive.
Risks
The wholesale lending business allowed banks to gain profit and grow without having to hire new employees. Many of the wholesale brokers that banks worked with were contractors for numerous lenders. But banks and other wholesale lenders faced the risk that outside brokers might sell risky but profitable mortgages for their own gain.
Recession
Wholesale mortgage lending was a major contributor to the recession that began in 2007. With loose lending standards, outside wholesale brokers made money by locking first-time homebuyers into mortgages they could not afford. Those consumers later defaulted on their loans and faced foreclosure. As a result, the real estate market plummeted and housing prices sank.
Wholesale Mortgage Market Fallout
Banks reacted by ending their wholesale mortgage divisions and cutting thousands of outside brokers. Bank of America announced a decision to end its wholesale mortgage business in 2007. Citgroup followed suit in 2008 by announcing that it would reduce its wholesale mortgage business work force to 1,000 brokers from 9,500. Many banks decided to have their in-house loan officers originate loans, thus making the transactions more personal.
