In the domino-chain world of mortgage banking, the fall of the warehouse lending sector has toppled into the correspondent lending sector. Yet in this case, the domino effect has not occurred. Granted, the tightening of available warehouse funding has produced a negative effect on the correspondent side of the business. But while correspondent lending is not at the robust level it enjoyed prior to the onslaught of the current crisis, it nonetheless is showing a sign of resilience.
Scott Stern, CEO of St. Louis-based Lenders One, notes that there is a good news/bad news approach to correspondent lending. The good news, he states, comes in the rising level of refinancing.
‘The refinance business is booming all across America, which is not surprising, given the continued access to low rates,’ says Stern. ‘This was helped by the fact that President Obama recommended to consumers that they refinance their mortgages – imagine hearing the president talk about the value of refinancing mortgages!’
However, Stern notes that the bad news in this scenario is the continuing shortage of warehouse funding. ‘The industry as a whole is suffering from the lack of capital,’ he adds. ‘Many companies cannot refinance the volume of loans for which there is demand. Some have to delay the closing of loans until they have warehouse line capacity freed up.’
Nicholas A. Bratsafolis, senior managing director with Lend America in Melville, N.Y., also observes the burden placed on correspondent lending by the problems within warehouse lending.
‘Like warehouse, correspondent lending has contracted substantially,’ he says. ‘The people in the field have tightened their requirements. You have millions and millions of borrowers who are in loans that, for various reasons, cannot be refinanced. The fact that someone can do a loan with a 560 FICO score a year-and-a-half ago and now the floor is 620 removes a lot of people from the available pool.’
Scott Everett, president of Dallas-based Supreme Lending, concurs on the warehouse-correspondent linkage. ‘It is the Achilles' heel of the mortgage business today,’ he observes. ‘We need additional warehouse lenders; otherwise, correspondent lending won't go anywhere.’
But unlike the warehouse sector, correspondent lending is enjoying a level of sustained activity. AgFirst Farm Credit Bank in Columbia, S.C., has seen its correspondent business flourish.
‘We've tripled our volume,’ says Beth S. Anderson, director of correspondent lending. ‘We're very, very busy, and we're seeing more inquiries coming in – customers want to do business with us.’
What is the secret to AgFirst's success? Anderson credits a combination of economic factors.
‘There is the decrease in rates,’ she explains. ‘Sixty percent of our customers come to us for refinancing, while the other 40 percent are new business loans coming in. And there are a lot of borrowers on the sidelines, waiting for the rates to decrease more.’
William H. McFaddin, president and CEO at Community Banker's Bank in Midlothian, Va., is also experiencing a healthy correspondent business. However, he notes that today's correspondent lenders are cognizant of the demands of the current economy. Â Â Â Â Â Â Â Â
‘There is more caution than in the past,’ he says. ‘It is important that correspondent lenders do their due diligence. Banks have come under closer scrutiny in regard to that.’
McFaddin notes that a number of community banks are struggling a bit harder than normal to secure correspondent lines. ‘Some financial institutions are having a more difficult time borrowing on an unsecured basis,’ he adds. ‘But if they have appropriate collateral, funding is available to them.’
More apprehension may be found in the reverse mortgage sector. Robert Yeary, chairman and CEO of Reverse Mortgage Solutions in Spring, Texas, notes that this sector's distinctive nature has created unique concerns in relation to correspondent lending activity.
‘Only about 10 companies can service these loans,’ he says. ‘A couple of companies pulled in their horns because of the high cost of doing correspondent lending. There is also a big concern coming up for wholesalers: where to deliver the product. Fannie Mae does 99 percent of the business, but at some point, they may withdraw.’
While reverse mortgage activity is surging, Yeary wonders if it will be significantly slowed due to the current situation. ‘The lack of correspondent lenders may cause people to be concerned about staying in the business for the long term,’ he says. Â
But even as some current correspondent lenders exit the business, Stern believes there will be other companies eager to take their place.
‘I expect to see new entrants in correspondent lending,’ he says. ‘Right now, there are a handful of viable national loan buyers. We know there are potential new market entrants looking at that as an opportunity, saying, 'We can enter the correspondent lending space and have a new buyer.'’
Stern adds that new faces may also be seen in warehouse lending. ‘We get calls once a week that say, 'We represent private equity firms or offshore investors or venture capital firms, and we are considering how to get into warehouse lending,'’ he says. ‘There is professional money looking at getting into warehouse lending space, and this will create some loosening of the crisis.’
One potential new correspondent lender could be Lend America. According to Bratsafolis, the company is current weighing its options on expanding into the sector.
‘Correspondent lending is an area that has a lot of promise, and there is a need for it in the marketplace right now,’ he explains. ‘It is something we are exploring very seriously. It is in the exploration stage right now. It is clearly needed – and whether we do it or some other companies fill that need, something has to be done. Clearly, there is no marketplace unless you are going to the major correspondent banks. But most people don't have enough product to draw their interest, or they cannot get the warehousing to do so.’
Terry Wakefield, president of The Wakefield Co. LLC, Grafton, Wis., notes that financial institutions that venture into correspondent lending will need to bring deep pockets and a higher-than-normal commitment to quality control.
‘You cannot build a world-class infrastructure without spending some money,’ he says. ‘The larger banks that find a way to deliver an exceptional level of service to a correspondent customer is going to win. The only thing a large mortgage lender can do is provide quality and speed in getting loan funded. Whoever can create that code has a tremendous opportunity to grow a correspondent lending business.’