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SAN DIEGO—GlobeSt.com joined hundreds of independent mortgage brokers for the third annual MBA Independent Mortgage Brokers Conference this week at the iconic Hotel Del Coronado here. While the weather was uncharacteristically rainy, attendees didn't seem to mind as they listened to the panel sessions from deck chairs in the Christmas-decorated ballroom overlooking the beach.

During the CEO Forum, moderator Stanley Middleman, president and CEO of Freedom Mortgage Corp., asked the panelists what were the necessary elements to putting an independent mortgage bank together. William Newman, CEO and president of Home Point Capital, said access to capital and liquidity are crucial elements, along with great people who can work together, understand the market and want to build something to meet the firm's objectives and create value. He pointed out, “There are more constraints in financial institutions than in independent banks.” And he added, “Have a partner who understands the cyclical nature of the business and has patient capital.”

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Understanding cash flow is a key element for independent mortgage brokers' success, said Andrew WeissMalik, COO of 360 Mortgage Group. He added, “You need a long-term plan, at least two to three years out. Ask yourself, 'Where do I have to be?' especially if you're self-funding.”

While being a subset of a bank is far different from being on the retail end of banking, “we're just as beholden to people as anyone who gives you capital. Capitalization is never free, and it's not cheap. Neither is managing capital. The total cost of originating a loan includes the cost of funding—it affects the bottom line.”

Operations management is another important aspect to independent mortgage brokerages. Newman said his firm focuses on building the company from the inside out rather than the outside in. While sales revenue is significant, companies must be positioned for the future.

When thinking about operational risk, WeissMalik said more volume doesn't necessarily mean increased profitability. Figuring out how much production you need in order to produce revenue is key for any independent mortgage brokerage that doesn't have a parent company it can go to for capital. Fowler Williams, president of Crescent Mortgage Co., added, “You can grow, but not be profitable or safe. It's hard to do all three.” And Middleman said you have to first manage risk before you make a profit, which is a quandary.

With regard to RESPA-TILA reform, Middleman asked the panelists, “How ready are we?” Williams said his firm is not completely dependent on the LOS provider, and WeissMalik said closing agents are one of his firm's biggest concerns, but it's probably best for the consumer to have standardized disclosures and to get the attorneys involved to listen to you. Williams added it's important to work with attorneys early, and Middleman pointed out, “You have to make sure your technology is wrapped so tight to get everything done before closing.”

Newman said, “You need to control the process effectively to get the level of accuracy needed. Fortunately, the level of effectiveness continues to go up as technology is added.”

Middleman asked the panel how they value MSRs. WeissMalik said, “You can't buy groceries with MSRs,” but they can be useful. “We look favorably upon the MSR.” And Williams added, “We have always tried to value servicing,” pointing out that it's necessary to know how to manage sub-servicers as well.

Middleman added, “Permanent capital is really important. Access to it is critical to growing your business.” He also said he thinks M&A activity and consolidation is going to become a big part of the business, and Williams agreed. “I think we will see a big pick-up in M&A, but there will be a lot of hand-shaking in the smaller lender space, not a lot of big acquisitions.”

Newman said there will be challenged companies in this environment, not because they are bad businesspeople, but because there are so many disparate elements of the business. WeissMalik recommended finding counterparties who are not getting certain services from other lenders and partnering with them to provide each other with solutions.