Mortgage brokers that transition to a correspondent lender can earn more, close more quickly and improve their image. But there is a cost to making the conversion. One of the most difficult steps in the process is securing a warehouse line.
A webinar held on Tuesday, Broker to Banker – How to Make the Move & Why, was presented by executives at Mortgage Quality Management & Research, First Tennessee and LoanSifter.
Ben Madick, president of Mortgage Quality Management, said that becoming a correspondent lender requires investment in infrastructure and technology. Becoming a lender that is funding the loans draws more regulatory scrutiny. He warned that making the move creates the risk of repurchase.
Correspondent lenders will need to hire employees for underwriting, compliance and closing in addition to secondary marketing staff.
The upside, however, is a bolstered image as a direct lender. Processing time can be much shorter.
Another upside to the move, according to Madick, is being able to recruit higher quality loan originators who won’t work for a mortgage broker.
Becoming a correspondent lender requires the development of investors and warehouse lenders.
“But it’s not an easy relationship to establish,” Madick cautioned. “Warehouse banks say, ‘we can’t approve you until you have a correspondent relationship with an investor,’ and vice versa.”
Thomas Marino, a vice president at First Tennessee’s warehouse lending unit, explained that becoming approved with a warehouse lender takes at least a month and can take up to three months. Before approving a warehouse client, the warehouse lender has to be comfortable with the company’s business model, financial standing and owners.
“The main focus of a warehouse lender will be to prevent fraud,” Marino’s presentation stated.
Resumes of key staff members will be closely scrutinized. Warehouse lenders want to see that staff has direct experience managing a warehouse line and hedging pipelines, while top executives need to have experience managing a company.
Annual audits should be prepared prior to applying for a line. First Tennessee requires three years’ audited financials. In addition, quarterly financials prepared on an accrual basis will be needed on an ongoing basis.
Net worth will need to be at least $1 million for lines up to $10 million, while the number jumps to between $1.5 million to $2 million for a line in excess of $10 million.
“You should be able to turn the line 1.5x per month,” Marino’s presentation stated. “So if you are doing $20 MM per month in volume you would need a $15MM line and at least $2MM in cash.”
He explained that some items on the balance sheet like notes receivable, bridge loans and real estate will be deducted from the net worth, as will capitalized intangibles like software and high amounts of long-term debt.
References from respected industry sources are a must, according to Marino.
A personal guaranty is required by the company’s owner and spouse. The owner needs to have liquid assets.
LoanSifter Business Development Manager Tim Kirksey highlighted how fees are far better for correspondent lenders. For instance, an administration fee at Stonegate Mortgage is $795 for mortgage brokers, $495 for non-delegated correspondents and $295 for delegated clients.
“Know the investor’s late delivery/roll/extension charges,” Kirksey’s presentation stated. “Some investors provide more ‘buffer’ than others, and pre-purchase review turn times always play a role.”
He suggested that brokers who are making the conversion might want to obtain prior loan approvals until they are confident with their underwriting staff.
Among the benefits he outlined are closing in your own name, maintaining control of the process and not disclosing yield-spread premiums.
One major benefit, according to Kirksey, is that correspondents earn up to 100 basis points more than mortgage brokers.
He noted that wholesale investors relationships should be maintained even after making the leap to correspondent lenders.
Mark Coupland, who is vice president of business development at LoanSifter, noted that correspondent lenders must manage their pipelines. Investors can choose to abandon the business, leaving correspondents holding the loan.
Coupland suggested that in-house guidelines should accommodate more than one investor in case one decides not to buy a loan.
When considering whether to become approved directly with an agency investor, Coupland says prospects need to consider that unlike non-agency investors — which involves up-front quality control — the housing finance agencies do the due diligence on the back end. That could increase the likelihood of repurchase. But the benefit to agency approval is much faster turn times.
He recommended avoiding jumbo loans early on, which can eat up the warehouse capacity.