By exiting the correspondent lending business, Bank of America opened the door for smaller institutions to step in and fill an unmet need. Bank of America's decision to close down its correspondent channel should not be viewed as evidence against the profitability of this business.
Over the past couple of decades, there have been a number of lenders that have been in and out of the correspondent and/or broker business one or more times. Dime, NationsBank, GoldDome, HSBC, Countrywide and MetLife have been among the institutions that dabbled in these lines of business, left them and then returned.
The opportunity exists today for mid-tier lenders that are ready to take advantage of it. But what does it really take to enter and succeed in the correspondent lending business?
As in any subject, the difference between the world's best and the rest is in the details. But in order to be a contender in the correspondent business, there are three primary considerations: you must have the technology required to provide needed automation, you must have the staff and technology to ensure effective communications within your enterprise and with correspondents, and you must have sufficient reporting capabilities to make good business decisions as the channel evolves.
As with other parts of the financial services industry, technology helps to level the playing field. While front-line loan originators depend on their loan origination systems (LOS) to fulfill their function, correspondent lenders need that and more to fulfill theirs.
Without the right tools, correspondent lending is a cumbersome, tedious and time-consuming process, with a large margin for human error. The wrong systems are generally characterized by the presence of a great deal of paperwork and the need to log in to and out of multiple systems.Â
Correspondent lending platforms run the gamut from supercharged LOS to custom-built platforms in use by the nation's largest banks. At its core, the correspondent lending platform must be capable of simplifying, automating and organizing the process of soliciting loans from correspondents, re-underwriting them as necessary to ensure compliance, purchasing them in bulk or flow, and then moving them into the secondary market.
With the newest technology, the entire process of correspondent lending can be seamlessly automated through one direct channel for locking. There only needs to be one variation of the process, which leads to standardization across the enterprise. There is no need to waste time faxing or emailing the lock forms or playing phone tag to get a verbal response. The new tech tools can lock in a loan with a keystroke.
Another feature in today's correspondent lending technology is the ability to embed log-in and password information directly onto the correspondent lending website, allowing correspondents to log in to a special webpage that is managed by the correspondent lender's secondary team. As new rates become available, changes to a single webpage share the new information with all correspondents, thus providing one-click access to a loan lock.
These pages are branded with the correspondent lender's look and feel, and they are pushed out at the same time to all company correspondents, thus making it easy for account executives to help their customers get their production sold.
Solid correspondent lending technology can lock loans individually or by entire pipeline, without manual entry. It allows the lender to set lock desk hours for lock submissions and suspend locks while re-pricing or for midday rate changes. It should also provide easy functionality for accepting custom lock requests.
The right team
A lender that sells most of its production to the government-sponsored enterprises (GSEs) or another correspondent lender has, at most, a few external relationships to maintain. The entry into the correspondent lending business can turn that into many relationships, each of which is the most important one to the lender's individual correspondents. This will require the lender to staff up.
Account executives will be required to carry the company's message to new lenders. Once those relationships have been initiated, technology can take over to maintain them. In fact, using technology to handle some transfers of information, such as locking information, is the best way to avoid costly mistakes.
There is an old-school mentality that says rates that are on paper will not be mistaken or changed downstream. There is no basis in fact for that notion – with the possible exception that fax technology is cheaper than modern correspondent lending technology.
The truth is that putting rate-lock information online in a secure, password-protected environment is the only way to ensure that all parties are on the same page at the time the loan is locked. Errors are much less likely to be made, and when they are, the problem will be caught by the platform's audit trail.
Too many times, a secondary marketing team feels it has to honor a lock in spite of an error. There are probably times when this is necessary in order to preserve a relationship. However, a large percentage of the time it is a user error or some other correctable situation.
Problems with loan locks are among the most prevalent challenges for correspondent lenders, but in reality, they are communication problems. In some cases, the tech platform can alleviate these issues by providing instant notifications for all loan-change requests to the secondary staff, transparent and complete pipeline visibility, custom responses to each action surrounding the lock process, and features for extending and archiving pricing.
Furthermore, the secondary marketing staff is likely to be required to successfully implement a new correspondent lending channel. The staff will be relying on the system to provide the information required to set pricing and move pools effectively into the secondary market.
In its most basic form, correspondent lending is the art of buying other mortgage lenders' production and then selling it for a higher price. Secondary market teams need direct access to all of the data in the correspondent lending platform, including access to all of their locks and the statuses of every deal in their pipelines. They will need to track production by correspondent, branch or individual user to determine the health of their overall pipelines.
In the post-lock period, managers will need access to data on all locks by specific time periods, the total loan amount and some form of generic mark-to-market analysis in order to estimate gains and losses. Like any other executive's information management system, the correspondent lending technology chosen by a new correspondent lender should return information in near real time in order to provide plenty of time for the lender to adjust to changing market conditions.
Once the technology and staff is in place to operate the new business, it will come down to the quality of the decisions the company makes when it reaches out to its correspondents, offers them pricing and acquires their production, and then moves the loan into the secondary market.
Don Kracl is founder and president of Mortech, based in Lincoln, Neb. He can be reached at (888) 529-3590.