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   ARTICLE   |   From Scotsman Guide Residential Edition   |   March 2012

The Future of Correspondent Lending

Getting in with government-sponsored enterprises may be your best bet

Correspondent lending is a niche market for many mortgage brokers and bankers. By working with a larger lender that ultimately will either sell or service a loan, brokers and bankers can underwrite and close loans in their own name. Finding that larger lender in today’s market can be challenging, however.

This past year, the correspondent-lending market saw the exit of several major servicing players, including Bank of America and GMAC Mortgage’s 3D program. Products of government-sponsored enterprises (GSEs) are among the few options left. These changes shape the way correspondents do business today and require them to respond appropriately. When contemplating becoming a correspondent lender, brokers and bankers should consider where the market has been and where it is going.

The long view

Previously, major correspondent lending players in the mandatory acquisition channels of conforming and government programs offered assignment of trade-commitment programs for lenders that were willing to manage their own loan-level price and fallout risks. Alternately, they offered flow programs under best-efforts delivery. All these programs had one objective: the acquisition of loan-servicing rights. At the height of the market, servicing values were competitive.

With the loss of many servicers from the market, however, one could presume that acquiring servicing from correspondent lenders has not been as profitable a venture as those acquiring the loans would like. Those that remain in this market may try to salvage their profits by getting servicing rights for next to nothing. They will try to get these loans from correspondent lenders for what they can turn the loans around for, primarily by securitizing and selling them in the secondary market.

The current market

Although correspondent lenders still can find viable, large entities as partners, the business may be less than lucrative. Servicing values have come down and potentially diminished the returns for correspondent lenders that are burdened with other costs related to file reviews, purchase delays, etc.

If correspondent lenders seek smaller entities in the servicing-acquisition business, the important question to consider is whether these companies have the capital and the financial depth to handle this business.

From a competitive point of view, if you’re a correspondent lender that is dependent on smaller entities as business partners, you may not be getting any advantage in terms of pricing — even if they claim incentives for volume and enhanced pricing. You must examine the value of the servicing rights you will be receiving.

Moving forward

To get out of this cycle, here are three points to keep in mind as you plan for your future in correspondent lending:

  1. Get approved by the GSEs so that you can cut out the middleman.
  2. Get to know your local community banker and see if there is a partnership opportunity.
  3. Look at not how much you will make on every loan, but whether you have an outlet for it.

By going directly to GSE lenders, you may bypass the correspondent that is now acting as your conduit and eliminate your dependence on a third party to distribute your loans to the capital markets. Although you will have to deal with the GSEs’ net-worth requirements, long approval times and a tough approval process, this may put your company on track to succeed in the future.


 


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