REQUIRED READING:Â Within correspondent lending, there is good news and not-so-good news. The positive aspect is that the liquidity tap continues to flow.
‘On the conforming side, there is more than enough investment activity to support current demand,’ says Joseph Badal, president of Santa Fe, N.M.-based Badal & Associates and former executive vice president and chief lending officer at Thornburg Mortgage. ‘The large lenders have a huge appetite for keeping these loans in their portfolios, especially when you consider the spreads between cost of funds and coupon rates on these loans. And then, of course, they are able to book servicing income off these loans.’
But then there is a major catch. Changes within the wider mortgage banking industry – particularly in regard to the problems facing the warehouse-lending sector and new regulatory requirements imposed on the industry in the aftermath of the September 2008 meltdown – resulted in a very different correspondent lending world, in which a few major institutions dominate the sector.
‘When warehouse lending got squeezed, correspondent lending kind of consolidated,’ observes Barry Epstein, senior vice president of warehouse lending at Triumph Savings Bank, based in Dallas. ‘Most of the players disappeared. And when the control is in the hands of four or five institutions, they can dictate pricing in the market.’
‘Correspondent lending is a very difficult sector of the market right now,’ says Diana Carter, principal at Atlanta-based Summit Mortgage Corp. ‘The larger players play a larger and larger role.’
Chris Edens, senior vice president at Grid Financial Services, based in Raleigh, N.C., notes that this situation is wonderful for the very few major institutions that dominate the sector.
‘If you're a larger player, you can be much more selective in the correspondents you take on,’ he says. ‘You own the client – you dictate to them. Constriction of the market made the big players kings and the small players serfs.’
However, some serfs are ready and eager to take on the kings. The smaller correspondent lenders are actively seeking out community banks and credit unions, and the results have been positive.
‘Our correspondent business is with community banks,’ says Carter. ‘And we have grown. Our business with community banks is stronger. We're in a better position to get business from community banks than a year ago.’
Carter notes that when it comes to correspondent lending, bigger does not necessarily mean better – or, in this case, agile.
‘For the larger lenders, it is harder to buy a few loans a month,’ she says. ‘And community banks originate 10 loans a month.’
Steve Hops, chairman of San Diego-based Guild Mortgage Co., notes that community banks that engage in business with the major correspondent lenders have found these larger institutions have a voracious appetite for other aspects of the smaller banks' operations.
‘Those institutions will go after community banks and credit unions and cross-sell their customers' checking accounts, savings accounts and equity lines,’ says Hops. ‘The community banks feel very proprietary about their customers. They want to originate loans, but they don't want that kind of cross-selling or cross-marketing after the close of the loans.’
Recognizing this situation, in February, Guild Mortgage started its own correspondent lending division, which is aimed exclusively at smaller originators that are seeking a correspondent line. ‘We've been talking to our friends at community banks and credit unions and determined there is an opportunity for us to market our services directly to them,’ he says. ‘We're hoping this is going to be a good business for us.’
Epstein predicts that more institutions will follow the Guild Mortgage example and enter the space. ‘I see a tremendous source of revenue for a smaller player,’ he says. ‘If they're in warehouse banking and are approved by the Department of Housing and Urban Development, that is an area in which to compete.’
‘We are going to see community banks buying loans from community banks,’ says Rick Seehausen, president of LenderLive Network, based in Glendale, Colo. ‘Credit unions band together to form credit union servicing organizations for that purpose. Insurance companies are also participating – Met Life in 2009 began growing its correspondent area.’
Badal notes that a niche market like jumbo mortgages might interest up-and-coming players within the sector.
‘On the jumbo side, there is a huge opportunity available for the investor community,’ he says. ‘But unlike the conforming market, there is essentially no backup secondary market. Some lenders – like Hudson City, ING, Astoria Bank and Union Bank – do have an appetite for jumbo paper, but these investors are not consistently in the market and have tightened their underwriting criteria so as to exclude major portions of the jumbo market.’
New woes
However, the correspondent lending sector may find itself continuing to evolve. Many people within the industry believe that recently enacted regulatory changes will have a serious impact on the relationship between originators and correspondent lenders.
‘Regulations favor the correspondent lender over the wholesaler,’ says Seehausen. ‘Ultimately, it will cost more to originate loans. And the consumer will have to pay more.’
Jean Badciong, chief operating officer of Inlanta Mortgage, based in Waukesha, Wis., has already begun explaining to borrowers why it costs more to originate a residential mortgage.
‘We've been doing a very good job on our end explaining the expenses going into this,’ she says. However, Badciong notes that other parties are adding stress to the process.
‘There is the additional pressure and scrutiny that Fannie Mae and Freddie Mac put on the major correspondent lenders and which they, in turn, put on us,’ she continues. ‘Fannie Mae's Loan Quality Initiative is in full force, and that makes the attention to detail in originating that perfect loan even more important nowadays. Having Fannie and Freddie in the correspondents' offices makes it an ever-changing, dynamic environment.’
And the result of this increased scrutiny, she adds, circles back to the originator and, ultimately, to the borrower. ‘It creates a more costly loan for us to originate, and the consumer pays the price of increased closing costs,’ she says.
Todd Carlson, senior vice president of correspondent lending at Mortgage Services III LLC, headquartered in Bloomington, Ill., notes that the new regulatory environment places a greater emphasis on consumer protection, albeit at the expense of institutions with no history of abusing or exploiting borrowers.
‘Unfortunately, it punishes those with sound business principles and ethics,’ he says. ‘It makes the mortgage transaction a lot more tedious, difficult and paper-heavy.’
Badal points out that the ongoing efforts to seek reform of the government-sponsored enterprises (GSEs) will probably complicate matters rather than alleviate them.
‘I believe the talk in Washington about scaling back or terminating Fannie and Freddie should have lenders scrambling for alternative homes for their conforming paper,’ he says. ‘There is little doubt in my mind that the GSEs' roles will be curtailed dramatically, which would mean that private capital markets would have to take up the slack. Absent the GSEs, private sources of capital will demand a higher return, thereby raising interest rates and closing costs for correspondent lenders and borrowers.’
And then there is the question of loan officer compensation, which might create a dent in the progress of the smaller, up-and-coming correspondent lenders.
‘It comes down to the Dodd-Frank Act and how we will be able to pay loan officers,’ says Grid Financial's Edens. ‘It is a loan-officer-driven business, but the business could potentially be broken until they figure out how to do it. This will have a direct impact on how the smaller correspondents do business.’
Edens adds that this issue will ultimately benefit the larger correspondent lenders. ‘There is going to be a great migration of loan officers to bigger players.’
Yet Rob Spellman, senior vice president of national production management at Troy, Mich.-based Flagstar Bank, has a Darwinian outlook of correspondent lending's future.
‘The state of change in the industry is driven by the macroeconomic environment and the regulatory environment,’ he says. ‘The market is going through a huge transition from refi domination to purchase domination. This makes it imperative for correspondents to be nimble and ever-changing.’
