A funny thing happened on the way to the mortgage banking sector being restructured: everyone and their brother is now eyeing the concept of correspondent lending.
Of course, there are two sides to the correspondent coin. Either a mortgage banker is a seller of product to bigger fish or he’s a buyer. And there’s even some firms that have it both ways, depending on the product.
But rest assured there’s a few logical reasons for the correspondent space opening up: some of the nation’s largest buyers of already-closed loans are scaling back their presence in the channel (freeing up market share) and active wholesalers see it as a less-risky way to gather product because they have the safety of “buybacks” and “reps and warranties” to potentially shelter them from losses.
According to figures compiled by this newspaper and the Quarterly Data Report, three of the nation’s top four correspondent buyers saw a decline in purchases in the first quarter. The biggest drops were experienced by Chase (down 24% in residential purchases) and Bank of America, which saw correspondent acquisitions drop by 18%. (NMN is now collecting second-quarter funding results.)
As reported a few weeks ago by NMN, American Home Mortgage Servicing, the Texas-based specialty servicer controlled by bottom fisher Wilbur Ross, is jumping into the space. But AmHome is hardly alone. Wholesalers the likes of Total Mortgage Services, Milford, Conn., and Union Bank, San Francisco, also are considering getting in.
Until recently, buying loans on a correspondent basis was a game dominated mostly by the nation’s megabanks/mega-originators: B of A, Wells and JPMorgan Chase. (In the first quarter the three had a combined correspondent market share of 50%.) During the financial crisis, some banks, such as Citigroup, either scaled way back or got out entirely, only to re-enter. In the first quarter CitiMortgage’s correspondent volume rose 42%.
In years past, the profit margins on correspondent lending could be razor thin, but that was before the Federal Reserve cut short-term rates to near zero.
Today, the outlook is different with the general thinking being that many up-and-coming players believe the industry’s big boys will de-emphasize mortgages because of Basel III servicing caps and other new regulations and rules.
Paul Hindman, managing director of Management Advisors International, an industry headhunting firm, said he definitely is seeing a pickup in requests for experienced talent in the correspondent space. “They’re looking for EVPs on up, someone who can run the business,” he said.
Hindman said he could not identify any of the firms seeking his help because of confidentiality requests, but pointed to PennyMac’s recent hiring of two top executives from Bank of America (one in lending, one in warehouse) as a sign of the times. “The perception is that B of A is cutting back,” he said.
In other words, if the larger players scale back, that means there will be more pie for everyone else. Then again, the immediate outlook for new residential originations is weak.
Joe Bryant, an industry veteran who has worked for Long Island Savings Bank and other firms during his long career, cautions that correspondent lending can be problematic. “At different points in time it can either be wildly profitable or not,” he said. “But right now if you’re a mortgage banker the thinking is that you need to be as many different channels as possible.”
At last check, wholesale accounted for just 7% of industrywide production with retail accounting for 56% and correspondent 37%. Retail has been gaining market share as a channel but also can be expensive because of the fixed costs of running a branch and staffing up. Will correspondent eventually match retail? Will some correspondent buyers also enter the warehouse space? Time will tell.
