Correspondent Lending Races Down A Bumpy Road

[u]REQUIRED READING[/u][/i]: Jean Badciong has noticed the change in the correspondent lending sector – but, then again, it is hard for her not to notice.[/b] ‘Has it changed!’ says Badciong, chief operating officer of Inlanta Mortgage, based in Waukesha, Wis. ‘In 2008, we sold to 13 different companies in correspondent lending. In 2009, we were selling to eight different companies. Today, we're selling to three companies – that's quite a contraction of available people we'll sell to on a regular basis.’ Badciong is not alone in watching the size of the sector decrease over the past two years. But while the quantity of correspondent lenders has declined, the level of activity currently remains steady. Furthermore, there are signs that both new and former correspondent lenders are waiting to re-enter the field – but changes to the mortgage banking landscape may create yet another twist for the sector. How tough is the current environment for correspondent lending? Terry Wakefield, president of The Wakefield Co. LLC in Grafton, Wis., points out a recent survey that details significant challenges. ‘In late 2009, a J.D. Powers & Associates survey showed that the average turnaround time from a loan application to funding increased from 30 days in 2008 to 47 days in 2009,’ he explains. ‘This is an indication that correspondents are experiencing some significant delays in funding. That may not be devastating, but it is extensive – and it is likely to get worse.’ Wakefield also notes the problems inherent to residential mortgage-backed securities (RMBS) as casting a pall on activities. ‘RMBS investors who fueled anywhere between 40 percent and 70 percent of the mortgage market over the past 20 years lost several trillion dollars, and they will not come back into the market until lenders can show an infrastructure that eliminates idiosyncratic risks,’ he continues. ‘How that filters down to the correspondent is unknown, but it is inevitable. No one wants assets with questionable quality running through the whole chain.’ Complicating matters has been the often-thorny relations between originators and correspondent lenders. Scott Stern, CEO of the St. Louis-based Lenders One Mortgage Cooperative, believes a period of mutual distrust may finally be coming to an end. ‘We feel there is a return to the level of overall confidence between correspondent lenders and originators,’ he says. ‘There is a recovery from the mutual distrust we saw in the industry last year – correspondent lenders didn't trust the quality of the processes of the mortgage banks, while the mortgage bankers tended not to trust correspondent lenders because they had to repurchase a lot of loans. ‘One year later,’ Stern adds, ‘there is a return to mutual trust. Correspondent lenders now very feel comfortable with their ability to underwrite quality loans and use processes to ensure quality. Mortgage bankers are more comfortable with correspondent lenders, who are now more focused on relationships.’ However, that's not to say that the road ahead is without obstacles. ‘We are still looking for the return to a normal market,’ says Stern. ‘By that, I mean one we had in the previous 20 years, as opposed to the past three.’ Patti Schumate, managing director of the conduit program at PennyMac, based in Calabasas, Calif., spots other obstacles ahead of correspondent lenders. ‘The outlook for correspondent lending is very positive, but the risk of repurchase is higher than it was, even though product guidelines have shrunk,’ she warns. ‘There is also a high risk around appraisal with fraud schemes changing constantly, which creates a challenge to perform due diligence. We will see more time on prefunding review as a result.’ The federal government isn't helping matters, according to Mary Kladde, president of Denver-based Titan Lenders Corp. ‘New regulations from the government-sponsored enterprises and the Department of Housing and Urban Development have caused serious problems for a number of correspondent lenders. Now, correspondents are supposed to show they made an attempt to comply, but there is no standard, and every investor has different interpretation,’ she says. And bringing everybody up to speed on the regulatory requirements can prove to be an exercise in patience. ‘We've had to pull out the regulations and highlight them,’ says Beth S. Anderson, director of correspondent lending at AgFirst Farm Credit Bank in Columbia, S.C. ‘We find that we have to educate a lot of people, including closing agents and attorneys. It is a learning process for everyone.’ [b][i]People power[/i][/b] As a result of these and wider industry circumstances, Kladde notes, the sector has gotten conspicuously smaller. ‘Today, many of the smaller guys are washed out at this point,’ she says. ‘Liquidity is not the issue that it was a year ago – net-worth requirements are up, and correspondent lenders raised capital to provide more liquidity. But the volume is off.’ Still, Kladde sees a somewhat Darwinian element in play. ‘The survivors are doing okay,’ she says. ‘The market share expanded for them, because there is less competition.’ Scott Everett, president of Supreme Lending, based in Dallas, believes that the smaller playing field has its benefits. ‘Overall, there are far few players, but they're tighter in some way,’ he says. ‘This is good from an underwriting standard, since quality loan files are being made and there are good-quality people doing this business.’ A.W. Pickel III, president and CEO at LeaderOne Financial Corp. in Overland Park, Kan., is personally aware of the personnel aspects of the business, particularly in view of the licensing of loan originators under the requirements of the Secure and Fair Enforcement Mortgage Licensing Act of 2008 (SAFE Act). ‘We had a lady who wanted to join our company, but she had filed for bankruptcy two years ago,’ he recalls. ‘We called the regulator to ask if she could join, but the regulator said no. Because of the SAFE Act, there is some adverse selection of those individuals with tarnished credit – they are not able to work in any aspect of correspondent lending unless they work in a bank. That makes my job a little easier, because I will be able hire people with clean records.’ Yet the correspondent sector's shrinkage may soon be reversed as new players consider the opportunities therein. Last September, GMAC Financial Services, based in Fort Washington, Pa., announced that the correspondent and warehouse lending division of Ally Bank had formed a correspondent community bank team that will work exclusively with smaller banks, thrifts and credit unions. Adam Glassner, executive vice president of mortgage capital markets at GMAC, believes this focus will help widen the scope of correspondent lending and, by extension, mortgage banking. ‘Many community banks and credit unions do not maintain a large mortgage department – or have any mortgage department at all,’ he says about the new division's target market. ‘Community banks may have an underwriting credit team, but they generally don't retain servicing. Or, they may do underwriting for Fannie and Freddie loans, but they would not have a Federal Housing Administration-approved underwriter.’ Jonathan Corr, chief strategy officer for Pleasanton, Calif.-based Ellie Mae, states that the community banks have the potential to be correspondent lenders on their own. ‘Community banks and folks with no baggage or bad loans can serve local markets or merge up and bring stability to serve mortgage bankers,’ he says. ‘Today's community banks are not putting everything they originate into their portfolio.’ Corr adds that the solid reputation of community banks would make them attractive as correspondent lenders. ‘People want folks with skin in the game,’ he continues. ‘The bias toward some responsibility for the loan makes it much more attractive to large investors, as opposed to doing something on the broker side.’ And speaking of brokers, Wakefield sees many of them appear to be hovering around the sector with the hopes of rejoining the activity. ‘It is logical that there will be various forms of combining mortgage brokers into pure mortgage banking operations,’ he says. ‘Also, lenders that walked away from the wholesale channels have begun to reconsider that decision.’ Barry Epstein, a Los Angeles-based independent warehouse banking consultant and a former senior vice president of Ocwen Financial Services, predicts that equity funds purchasing troubled or failed banks can use such vehicles to explore the correspondent-lending environment. ‘The people at these equity funds do not have a banker mentality – they have an entrepreneur mentality,’ he explains. ‘They can buy a bank cheaply, but they will need way to get cashflow moving, rather than have the money sitting around. Correspondent lending is one of the ways to get there, and the equity funds have enough capital to make this happen.’ [b][i]Cloudy future?[/i][/b] But Epstein notes that any new players entering the market will need to be approved by Fannie Mae, Freddie Mac and Ginnie Mae, which will take more than a little time. ‘That's taking lots of time now, because the agencies are backed up,’ he says. ‘It is taking at least six months to get approved.’ Yet even if any would-be correspondent lender gets started now in preparing to set up shop, the situation in mortgage banking can easily change in six months. Kladde is concerned that current indicators point to a rockier road. ‘I think we're not going to see a huge spike in originations,’ she says. ‘The Fed is talking of increasing rates. If that happens, we may see a little bit of a drop-off in the current steady production of loans. Also, a lot depends on the good-faith estimate (GFE) – that's now a binding contract, and you cannot change that willy-nilly or add a fee. You are held to what you disclose on the GFE.’ For Inlanta Mortgage's Badciong, the rest of the year may hold some problematic surprises. ‘There is so much uncertainty on when the Fed stops buying mortgage-backed securities and how the market would react to that and to when the first-time home buyer tax credit goes away,’ she says. ‘Looking ahead, the focus for most correspondent lenders has to be on quality of everything we're doing – the pull-through from correspondent lenders will be extremely important in the next six to 12 months


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