Recent mortgage originations generated through third-party channels are performing nearly as well as loans originated through the retail channel.
Loans originated by mortgage brokers and correspondent clients prior to the financial crisis defaulted more frequently than retail-originated loans.
But mortgage lenders and investors have since tightened their lending and regulatory controls for residential loan originations from third parties.
The tighter controls have narrowed the gap in loan performance between retail and third-party originators, according Moody’s Investors Service.
The same holds true for third-party loans originated for Fannie Mae and Freddie Mac. While retail originations from 2004 through 2008 defaulted far less frequently than third-party originations, recently originated third-party loans are performing as well — and even slightly better — than retail originations.
The ratings agency explained that processes and interactions with third-party originators have been altered to reduce defective credit and appraisal underwriting and fraud.
Some lenders have stopped acquiring loans from correspondent clients that weren’t originated by the correspondent’s own retail loan originators.
Another step taken has been to increase controls over loans sourced by mortgage brokers. While brokers still collect loan documentation — third-party fraud detection tools are utilized, and income information is verified directly with the Internal Revenue Service.
“The narrowing of the performance gap between third-party and retail-originated mortgages is credit positive for newer residential mortgage-backed securities, although economic stress could expose weaknesses in third-party loans that are not yet apparent,” Moody’s Vice President Kathy Kelbaugh said in a news release. “The risks to RMBS from third-party originations will vary depending on whether it is a broker or a correspondent that initiates the loans and on how much oversight originators and aggregators exercise over the third parties.”
Moody’s did note, however, that RMBS pools with retail originations will typically incur lower losses than RMBS pools with third-party originations due to increased underwriting control on retail loans.
