Regardless of which origination forecast is used, and there is certainly no shortage of ones to look at, 2015 should prove to be a good purchase market. Many are saying that over half of these loans will come through the retail origination channel.

However, a growing percentage can come through the correspondent channel which can be a function of economics in terms of servicing released premiums paid versus selling direct to the GSEs.

I know we are not even through the first quarter, but it appears like more of the same from last year is happening in terms of MSR (mortgage servicing rights) activity levels. I’m still seeing many larger servicing packages being offered by many of the servicing brokers in the market. Some of them tell me that they fully expect this to be another “banner” year with respect to servicing trades. This is still quite a liquid market and is worth following with close scrutiny.  I am often told by lenders that they use “best execution” selling strategies for each loan originated where we are involved with the matchmaking for the sale of the loans or servicing.

While we’re on the subject of correspondent lending, there are still quite a few players in the market focused on bulk acquisitions/mandatory deliveries. Many of these investors have entered this space due to the difficulties in pricing for loans in the loan-by-loan best efforts model during a very volatile time in the bond market and many days with multiple rate changes.

In many ways, the investors are smart in passing along any of this interest rate risk to the originators who are “holding” the loans until sold. Their margins get compressed but so does everyone’s during this time in the business where there are still many investors bidding up mandatory bulks for Fannie Mae, Freddie Mac, and GNMA products.

As discussed before, the winning bidders are typically loan level; so for a given pool of loans that are sold, there could be multiple winners which means carve outs to those loans assigned to the winning bids. Although there can be lower volumes for some, the transfer of interest rate risk chasing the best efforts market makes this “less painful” for many of these investors. Some specialize in bidding FHA loans aggressively while others bid lower coupon conventional loans, etc. Some even get more aggressive in certain geographic markets in which they need to diversify and pay up accordingly. While some bidders are aggressive on the higher end of the credit spectrum, there are others who actively want more of the lower-tiered credit quality borrowers.

Additionally, an interesting phenomenon is evolving with warehouse banks who are eager to set up “strategic partnerships” with nonbanks that also offer access to their portfolio loan programs and will purchase them like any other correspondent investor. This has become a unique way to differentiate themselves in a very crowded space while efficiently adding quality assets to their book of business. Ultimately, this can be used as a recruitment tool by the nonbank who is not only competing at the street level on price and product, but people too.

In summary, correspondent lending has lots of checks and balances which allow it to work today. As some of the larger money center banks want less FHA business, there are many nonbanks willing to step in and fill the void. The same holds true for the prime jumbo sector where some have made a market in tapping correspondents interested in growing this channel where there is less competition. While some worry about overcapacity, I’m convinced there is a place at the table for many of these investors as long as they can sell the correspondents what their value proposition is.

As the optimists keep reminding us in the trade publications, this will be another banner year in mortgage land!

Lloyd San

Lloyd San - Retired MGIC Mortgage Market Manager

A 30-year mortgage industry veteran, retired in 2021, Lloyd San served as Mortgage Market Manager for Mortgage Guaranty Insurance Corporation (MGIC). Overseeing a national effort, he was responsible for managing all client-related capital market activities in the areas of bulk and correspondent loan referrals, investor introductions, structured products, whole loan sales, as well as product and personnel introductions.

In addition, he is chairman of the California Mortgage Bankers Association, Secondary Marketing Executive Committee and also serves on the Western Secondary Conference Committee.

A graduate of San Diego State University in California, Lloyd received his MBA in Financial Management from National University. He also holds a California Real Estate Broker’s License.

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