Correspondents have more control over their destinies than other third party originators (TPO) operating in the US mortgage market. They close loans in their own name and therefore, depending on the investor they plan to sell their whole loans to, they have a lot of freedom in how they underwrite and price their loans. They create their own deals with warehouse lenders and often maintain the relationship with their borrowers after the loan is originated.
This is a simplification, of course, as any correspondent lender will affirm. Still these are some of the reasons that many mortgage professionals grow their business to the correspondent level instead of simply continuing to broker loans.
Given the hard lessons correspondent lenders learned during the COVID-19 crisis and what they have learned about operating their business under stress, there is plenty of evidence to suggest that these lenders will be the big winners in the market that is even now coming into focus.
Essex Mortgage recently explored this issue in some detail in a new white paper. In this article, the authors from Essex Mortgage's Correspondent Division explore the new lending environment correspondent lenders find themselves operating in today and discuss the path successful Correspondents will take to succeed.
What correspondent lenders learned in March 2020
When the coronavirus found its way to America, it started a chain reaction that would lead the U.S. economy to the brink of disaster. Even though the markets were doing great in February, by early March 2020 there were clear signs of danger on the horizon.
One of the first signs was the falling value of Real Estate Investment Trusts (REITS), which were down 41.9% in late March from their February peak. Suddenly, trading volumes rose to record highs, doubling by early April. At the same time, the market started to see opportunistic margin calls that led to lawsuits.
Meanwhile, insiders began to worry that there would soon be a glut of MBS on the market as investors sold off these assets in a search for liquidity, driving prices even lower. This had a marked negative impact on the large aggregators, who were battling two other negative environmental trends, (1) loan volume was very high, and (2) the health crisis was shutting down offshore processing centers, negatively impacting their capacity, a problem that persists at the time of this writing due to the second wave of coronavirus in India and the Delta Variant.
While this was a difficult time for all lenders, the pandemic threw correspondent lenders into crisis. At first, aggregators shut down production. And when it began to come back thirty days later there were fewer products they were willing to buy. Worst of all, their pricing tanked at the same time lender volume exploded.
Correspondent lenders who had loans in the pipeline suddenly found themselves in a very uncomfortable position and with no good source of liquidity. Furthermore, without doing anything wrong these lenders suddenly saw their repurchase risk rise significantly and their pricing fall.
Increased aggregator margins, the elimination of products and modifications to loan level price adjustments resulted in serious problems for correspondent lenders. Small- to mid-sized institutions bore the brunt of the impact of lower prices for loan sales. Lenders who did not already have agency approval to sell their Federal Housing Administration (FHA), Veterans Affairs (VA), Rural Housing Service (RHS), and Public and Indian Housing (PIH) mortgages to Ginnie Mae were in trouble.
Within days of the crisis, lenders who were selling their production primarily to aggregators began to realize, perhaps for the first time, that their business partners didn’t really view them as partners at all.
The impacts on the correspondent lending business
Some will argue that the aggregators had very good reasons for the decisions they made. There was a great deal of uncertainty and volatility in the market. It was not clear whether they could take the loans they purchased to the GSEs if the borrowers were in forbearance, or even at risk of going into forbearance in the future. Information coming out of the FHFA during these early days was not comforting.
The entire system was very near the edge of collapse. Had the Fed not intervened when it did with the promise to begin buying securities, the market could have crashed. Aggregators were making decisions that their appetites for risk dictated. The losers were the frontline correspondent lenders.
The impacts these decisions had on correspondent lenders were obvious. First, pricing was low, much lower in March 2020 than live bid pricing for Fannie & Freddie and lower even than that for Ginnie Mae. Ultimately, there was a realignment between Aggregator and Agency pricing and the spreads normalized. But through all of this, correspondent lenders had no transparency into why this happened or what they could do about it. It made for many sleepless nights as lenders worried whether their businesses would survive.
In addition, there was a great deal of uncertainty on the correspondent lending side among originators who were putting their window of exposure in the hands of an aggregator. It was taking a long time for the deals to be purchased and correspondents were on the hook to their warehouse lenders during the process.
With aggregator best efforts and mandatory both requiring more than 15 days to process and close last March, many originators wanted to go directly to the Agency Cash Window and save ten days or more. But not all lenders had the wherewithal to do that. For many, the experience was a rude awakening.
Today, correspondents have a much better idea of what they really need in a correspondent lending partner and that will be the key to making them incredibly successful in the future.
The path forward for Correspondents
What does all of this suggest for the future of the correspondent lending business?
We think it means that these loan originators will be much more careful about the partners they choose to work with in the future. We expect them to have a set of strict guidelines and standards that they expect their partners to meet before they agree to sell to them.
The good news is that there are new partners in the market today who are willing to be the partners these lenders need now.
In Essex Mortgage's new white paper, it lays out exactly what it believes these future partnerships will look like.
