PERSON OF THE WEEK: Jeff McGuiness is CEO of Lenders One Mortgage Cooperative, a national alliance of leading community mortgage bankers, correspondent lenders and suppliers of mortgage products and services. MortgageOrb recently interviewed McGuiness to get his views on the changes taking place in the correspondent lending space, as well as when the industry will see ‘alternative products’ make a return.
Q: How would you describe the competitive changes taking place in the correspondent landscape?
McGuiness: I think you can safely say that a complete recalibration of the landscape is well under way. As often happens in disrupted markets, the gap widens between those who are well positioned to maneuver the changes and challenges from those who are not.Â
We are seeing a decisive shift in market share losses primarily coming from the large money center banks, while non-bank lenders are experiencing aggressive market share gains. In addition, progressive correspondent buyers have begun to differentiate themselves by modifying FICO, loan-to-value ratio and other overlay adjustments.
Q: How/when will alternative products return to the market?
McGuiness: As the market continues to absorb the effects regarding the distinction between qualified mortgage (QM) and non-QM loans, the landscape will continue to evolve and become more defined. We will then see more lenders becoming comfortable in offering what is currently classified as non-QM product.
I believe there will be a gradual modification of the non-QM product, and as the performance of these loans proves itself, it will support the secondary market liquidity of the products going forward. I see this playing out in the market as a prolonged process during the next several years.
Q: What will the availability of alternative products mean to lenders (loan sellers)?
McGuiness: What we hear most from our Lenders One members is that a clear definition of their rep and warrant risk is required before they would originate alternative products.Â Based on their feedback, any buyer of these loans should focus on transparency and clarity with respect to the originator's obligation in order to generate momentum. From our point of view, we no longer see an environment where the independent mortgage banker will originate product without clarity, just for the sake of margin.Â
Q: What effect will those changes have on production costs?
McGuiness: As in any manufacturing process, product change can come at a cost. Our industry has absorbed the expense of increased regulatory scrutiny in the manufacturing process while doing so with a fairly confined product set. A broader product offering will put additional cost and compliance strains on an already taxed segment of the origination process. In order to reap the benefits of potential added revenue, originators need to understand their true risk, in order to properly establish processes and understand how they affect margins.
Q: How can lenders competitively leverage this new landscape?
McGuiness: Adaptation is the key. We see Lenders One members and others who have remained strong and successful by being willing to do things differently and accept the new realities of our industry. They have focused on adherence to the current regulatory environment, invested in the appropriate technologies, engaged third-party providers as subject matter experts and diversified their resources. Eventually, that mindset will afford them the ability to offer a varied product set in an equally successful manner.
By focusing on the essential elements of originating a loan and accepting outside expertise to streamline the manufacturing of the loan, a foundation is created that enables lenders to understand, evaluate and thrive in a challenging market environment. Ultimately, it comes down to having the willingness to partner with third-party providers who provide the knowledge and flexibility to understand and focus on the new landscape. Lenders can then optimize the new opportunities by working with their strategic partners and can continue to focus on the essential elements of what is critical to making a loan.
Giving up control in order to ensure control is actually what is most important – and a fundamental component of the originators' new paradigm.