In a move that will significantly expand its market share in the correspondent lending space, Flagstar Bank FSB recently acquired the delegated correspondent lending platform of Stearns Lending, along with certain related assets.
Through the acquisition, Flagstar – which already has a fairly large delegated correspondent business of its own – gains a significant number of correspondent relationships, accounting for more than $7 billion in agency and government loans in 2016. The deal would have made Flagstar the fourth-largest correspondent mortgage lender for the full-year 2016.
To learn more about what this acquisition means for Flagstar customers and how the transition has been going so far, MortgageOrb recently interviewed Brian Vieaux, national production director for third-party originations for Flagstar.
Q: Congratulations on the recent acquisition of Stearns’ delegated correspondent lending business. Please tell us how this deal came to fruition. Given Flagstar was already strong in the delegated space, why the push to expand market share by acquiring this business?
Vieaux: I think it was an opportunistic deal for both parties. Stearns has built a very strong brand around its wholesale and retail channels. Obviously, it is a long-standing lender in the industry.
The delegated correspondent business is one that Flagstar is already in today. It’s our smallest channel in the B-to-B space, and we saw an opportunity to grow that channel. And the reputation of the Stearns business and platform was really good.
Q: How has the transition been going so far?
Vieaux: I would characterize the transition as ongoing. We are actively engaged as one team – and we have been highly impressed with the level of expertise and professionalism from our new team. They’re hitting the ground running – and they fit very well with our corporate culture.
We are very pleased with how the teams are working together. There is plenty of heavy lifting ahead of us, but we are as confident, if not more confident, as we were going into the deal with the level of cohesiveness the teams are displaying.
Q: How are things meshing up in terms of the skill sets and training?
Vieaux: You’ve got the production folks – the customer-facing sales team – and that team is a very industry-seasoned team. Some of those folks have been with the largest national lenders over the years, and they have long-standing experience specifically in correspondent lending. That team focuses on the correspondent execution – from best efforts to mandatory bulk, etc. There’s definitely a high level of expertise around that. That team is coming up to speed with Flagstar’s non-agency products. And they’ll be able to offer those products to their clients.
On the operations side, when you talk about correspondent fulfillment and operations, it’s really all about loan-level due diligence. And one of the things that was attractive to us, in particular, was that the due diligence process for the Stearns line of business matched up well with how we look at things, from a credit risk perspective. As such, the folks who do that work have similar skill sets to the folks that we have in similar functions here. The key difference is that they work on a different technology platform.
Q: Stearns has more than 250 correspondent relationships – it’s a fairly large operation. So, in a way, when the two operations are merged, the question is, who ends up becoming more like the other in terms of things such as policies, procedures, training and technology?
Vieaux: The mind set that we have with regard to that is that we always focus on best practices. We have a watchful eye on quality, compliance and regulatory oversight, as well as the customer experience. And those are the things that we continue to focus on as we make this transition.
We made this acquisition because this is a business segment that we are committed to – and that we want to grow. And so our focus really becomes what’s best for the customers as they transition to working with Flagstar.
Also, things meshed up really well from a due diligence perspective – that was one of the main reasons this opportunity was so appealing to us.
Q: What does this deal mean for Flagstar in terms of market share and its geographic footprint?
Vieaux: One of the challenges is measuring the correspondent business because there are so many segments within correspondent. We do a lot of correspondent business today at Flagstar: Pre-acquisition, about 85% of what we did was non-delegated correspondent. The Flagstar account executive team has done a terrific job of growing and managing the nearly 1,300 TPO relationships that we had prior to the acquisition.
When you think about the top five correspondent investors for delegated execution, they tend to be the larger money-center banks and non-bank lenders. So, this transaction kind of holds our spot in the upper end of the top 10 correspondent investors.
But we think that over time, we will continue to grow that segment. Right now, we’re not as focused on share, per se, as we are on growing our business with the right counterparties.
Q: With the Stearns team now on board, what’s the opportunity to grow market share and expand business with their customers?
Vieaux: For those clients who were not already Flagstar clients, they’ll now have the opportunity – and we’re engaged in a lot of these discussions already – to have access to the Flagstar non-agency product menu, i.e., our jumbo fixed and jumbo adjustable-rate mortgage products. And we recently rolled out a one-time close, agency construction product, so those customers will have access to that, as well. Plus, we have some second mortgage and home equity line of credit offerings, as well.
And then, outside of the correspondent business line, we are one of the leaders in warehouse lending. So, we’ve already had discussions with some of these new clients regarding warehouse opportunities. We have sizable warehouse lines – plus, we have some syndication in our warehouse business, as well. So, for some of these larger clients, it’s an opportunity to learn about our warehouse business, and it’s a great opportunity for us to expand our customer base in our warehouse business.
We are also a subservicer – we service for others – and we’ve had several discussions with potential subservicing clients as a result of this acquisition, as well.
Q: You mentioned that Stearns was on a separate technology platform – what has taken place so far, in terms of switching out technology, and what still needs to be done?
Vieaux: On the technology front, again, for us, it’s all about process, policy and customer experience. Currently, we’re evaluating both the existing Flagstar technology, which is a homegrown platform, and the technology used to run the business we just acquired. We’re doing a side-by-side to evaluate best practices and also look at them from a productivity perspective. We are also trying to determine which platform provides the best customer experience.
But we still don’t know what we’re going to look like as an end state. It all depends on which platform – or which combination of platforms – provides the best customer experience.
I want to add that the technology team at Flagstar is very skilled and is working extremely hard to determine the best way to hook the Stearns technology in with our core system. In fact, in very short order, they were able to create an integration that, literally on day one of closing the acquisition, allowed us to purchase loans that were originated on the Stearns platform.
So, we hit the ground running – by funding loans on the same day that we closed the transaction – and that is a real testament to the Flagstar IT team.
Q: One of the critical aspects of any correspondent lending program is oversight. How are you handling that, and are there any challenges?
Vieaux: There are a couple of layers of oversight in the correspondent business. One is loan level, which we already touched on – how we are integrating our due diligence at the loan level. As I said, we’re very comfortable with the level of due diligence in the process – and with the technology that we acquired – because it does match up very well with what we have at Flagstar.
And then there is the counterparty due diligence piece of it, as well. That’s an area where Flagstar is strong. We’ve spent a lot of energy and resources in establishing a robust and talented counterparty management team and program.
As a regulated financial institution, it’s a very important component for us – counterparty and vendor management. Because it is such a strong area for us, we were able to readily scale, in terms of adding these new relationships. We’ve already integrated our oversight into all of these new accounts.
Q: Is there anything else you’re doing to integrate the two businesses? What about training?
Vieaux: Training is another area of strength for Flagstar. We have a very mature, built-out training program within our human resources group. And, being a bank, there is a lot of compliance and regulatory training that everyone at the bank must test out for.
All of the staff that we acquired have been engaged in that same regulatory compliance training as part of a standard new-hire onboarding. And then we have the standard training for our business unit, including credit and due diligence, and we provide that training for all new staff.
We’ve gone on-site to the location where the Stearns platform is housed and done a lot of training there, and we’ve also had folks from the Stearns team here at the Flagstar headquarters in Troy, Mich., to get acclimated with all things Flagstar, including policy and procedure.
You asked if the new team falls into the compliance requirements of Flagstar, and the answer is yes. We have one set of compliance oversight, regulatory policies and procedures, and we’re all following those today.
What you find is that, in the correspondent space, and mainly in the delegated channel, these correspondent lenders, these sellers, have to be able to have multiple outlets for their production. And then, when you get into the bulk mandatory space, from a pricing perspective, it’s certainly more of a bid process. But the underlying loans, from a credit guideline and compliance requirement perspective, have to be pretty homogenous in order to sell them into that environment. So, when we look at our policies and procedures, we feel like we are in line with the rest of the industry. And that plays out with regard to the volume we’re doing in the space.
Q: Why is this the right time for Flagstar to be growing in the correspondent lending space?
Vieaux: When we look at how we relate to the industry, you can easily look back and tally our volume and translate that into a share. There is some of that, from a benchmarking perspective, but it really comes down to, at the channel level, what are we trying to accomplish.
We have been in the B-to-B third-party mortgage origination space for the better part of 25-plus years. And if you went back, decade by decade, and looked at the leader board, in terms of market share, you’d see that Flagstar was on that leader board consistently. This is a direct reflection of the strong team of account executives at Flagstar. Several of our account executives have had 20+-year careers at Flagstar, leading to long-term loyal relationships with many of our customers. This acquisition also benefits the existing account executives and customers of Flagstar. It further enhances our delegated correspondent business, including expanding our capabilities in the mandatory/bulk executions, so that as our customers grow and evolve, our account executives have the ability to continue to serve them.
This acquisition really firmed up our position in the third-party business. We’re among the market leaders in the wholesale lending/broker space. We’re definitely a leader in the emerging mortgage banker, non-delegated correspondent space. And this acquisition puts us in pretty good company in the delegated correspondent space.
So, if you think about the lifecycle of a potential client, who starts as a small, independent broker and grows into a large mortgage banker, this line of business really allows us to retain customers through their evolution. And when you line up our warehouse business and our subservicing business, that even further cements the relationship – cradle through life.
Q: Anything else about this acquisition that you’d like to add?
Vieaux: We’re extremely committed to our correspondent line of business – but it’s important to note that we’re not de-emphasizing any other line of business that we’re in today. In fact, we’re really committed to our third-party origination channel as a whole.
It’s only 60 days or so into the transition; we are very excited about the team that has joined Flagstar, and we’re looking forward to expanding our customer base accordingly.