Archive

July 1, 2008

Rethinking Correspondent Business

By Scott Kersnar

As correspondent lenders went through a trial by fire over the past year, one subprime/alt-A specialist after another melted away. So did those who failed to pay strict attention to their own liquidity and those that relied on too few investors and too few warehouse lines.

The correspondents that have passed the test and thrived, by and large, have been those that have partnered well and those that leverage technology to do agency and government loans efficiently. Streamlining processes via technology is an absolute must for correspondents today.

Leading mortgage technology vendors have refined Web-based technology to address the correspondent transaction from the first contact with the borrower to the sale of the loan to the investor. In fact, document management and delivery on the Web has become such a commodity transaction that the only mortgage doc management providers likely to survive are those that bundle doc management with other services such as compliance, or those that also serve verticals other than the mortgage industry. For example, in September 2007, Xerox purchased Advectis' BlitzDocs in a move likely to resonate across multiple verticals beyond mortgage.

Flagstar Bank's launch of DocVelocity (see sidebar) puts further pressure on vendors to find more ways to add value by offering free access to doc management, workflow and investor delivery tools that can be used with investors beyond Flagstar itself. Today companies like Ellie Mae, eLynx, Lydian, Wolters Kluwer and others feature additional services such as fraud detection, compliance, e-collaboration, e-closing, automated QC and e-vaulting beyond investor delivery.

Led by VirPack, a host of vendors incented by successive refi booms vied to master the investor-delivery transaction. In May 2007, Lydian made a major enhancement to its Mortgage Connectivity Hub to enable investors to accept loans from sellers electronically "whether loans are sent in the seller's own native loan origination system format, in MISMO format, or following the investor's own proprietary specifications."

Also in May 2007 eLynx extended its document communications network to include Wells Fargo funding, thereby enabling hundreds of eLynx lender clients to deliver closed loans to Wells simply by selecting Wells from a drop-down menu of investors and then electronically transmit files seamlessly into the investor's own computer systems.

For one, Missouri-based Pulaski Bank reported delivering hundreds of loans to CitiMortgage and Countrywide within a month of utilizing SwiftSend Investor Delivery. eLynx now offers a set of Web tools - including Internet FAX, e-disclosure, e-signature and its Total Fulfillment e-workflow system - to give lender customers access to one-stop shopping paperless lending practices.

The collapse of the subprime market made streamlined investor delivery a side issue, as the market turned risk-averse and minimizing risk became crucial for correspondent lenders. However, the companies that have leveraged automation in the past are proving their resilience in the current market.

Encino, Calif.-based Skyline Funding responded to the industry meltdown by going into an acquisition mode, and currently is targeting several competitors to achieve "critical mass for the remnant part of the storm we've been through." Skyline CFO Daniel Shields said only correspondent lenders already leveraging Internet technology efficiently "to do speedy transparent transactions" and those with a "very robust LOS" were able to survive. He said Skyline has a proprietary LOS system that enables efficient workflow and document management.

Skyline's key technology partnerships are for the front end. Skyline uses Interthinx for fraud detection, because "we think reputation is most important and for that you need verification of the data." Their product-and-pricing engine is Optimal Blue. "We chose Optimal Blue before the meltdown hit because we were manually controlling product and pricing. That's very difficult to do now. Volatility is 50 times greater than it used to be. If we go to price a particular loan with a particular line when the investor is making a change, Optimal Blue will tell us we have to hold on locking the loan. It's that dynamic."

Knoxville, Tenn.-base Mortgage Investors Group, founded in 1989, pioneered using automated underwriting in 1995. The company already was an approved Freddie Mac and Fannie Mae seller/servicer and FHA/VA lender when the subprime meltdown hit the industry.

"We only survived because we closed down our very risky West Coast wholesale channel in August 2007," said MIG president Christine Rhea. "Over the past 19 years we have developed a strong retail footprint. We were able to re-focus and concentrate on a platform we were very familiar with. Products were not an issue for that."

MIG, a member of Lenders One Mortgage Cooperative, has grown from $24 million in its first full year of operation to $1.5 billion in 2006. Exiting wholesale has slowed its reaching the $2 billion mark, but the company's retail network in Tennessee and Mississippi continues to grow, as does its Direct Lending Community Banking network and its community banking relationships in six states.

MIG currently uses two LOS systems - Harland E3 for its retail channel and Avista for wholesale. "We are closely evaluating the integration of retail onto the Avista platform as well," said MIG CIO Jeff Scott. "That will give us the opportunity to integrate some of our processes with imaged workflow built into the entire platform. That's a huge advantage."

Ms. Rhea said the key for MIG is "automating as many processes as possible all the way to closing, integrating imaging so that the underwriters are able on a real-time basis to underwrite a file as quickly as it is sent. Our loan officers have definitely increased originations." She said that streamlined handling "is one of the fundamental services we provide."

A key efficiency she pinpointed as a correspondent lender is in "exchanging data with our warehouse line - what's being cleared, what's not." Because the data feed to the warehouse line occurs simultaneously, there is no slowdown on a quick closing, she said, "and we get the greatest advance rate with our warehouse lines."

To succeed today, every correspondent lender must find a way to say the same. Stanley Street of Street Resource Group commented, "The name of the game in warehouse lending is still this huge lack of supply and unrelenting demand. There is a significant deficit of warehouse lines that need to be processed. The Washington Mutuals and First Collaterals have withdrawn from the market and the warehouse lending operations of big lending institutions are still being given directives to reduce their portfolios." That creates opportunities for the midsized players, he said. "Now is the best time to be in the warehouse business. Most of the paper is being sold up through very solid institutional investors."

Mr. Street said new warehouse lenders are being organized and will soon enter the market. A factor making warehouse lending attractive today, he said, is that "while the cost of funds has gone up in some cases, the cost of warehousing is secondary to the availability of funds." Given that lingering uncertainty, Mr. Street advises correspondent lenders not to rely on a few favored lines. "Don't be solely reliant on one supplier," he counseled. "Have two or three warehouse lines."

With the huge resurgence of government loans today, an issue for lenders and their AUS providers has become access to FHA TOTAL Scorecard via XML-based interfaces. The Federal Housing Administration's TOTAL (Technology Open To Approved Lenders) Scorecard was developed by HUD to "evaluate the credit risk of FHA loans that are submitted to an automated underwriting system" and "ensure that applicants for FHA loan insurance are evaluated by the same scoring process regardless of the AUS vendor submitting the loan" so that "no borrower will be denied an FHA insured mortgage loan on the basis of a refer classification by an AUS."

The development kit for TOTAL is openly accessible on the FHA website. The problem is that FHA has restricted access to TOTAL scorecard interfaces to only a few AUS systems - LP, DU, Chase's Zippy system and a few others. At a time when demand for government loans is exploding and cutting costs is crucial, correspondent lenders are being forced to get automated FHA approval by paying to access TOTAL Scorecard through LP or DU.

With both Congress and the American public expecting FHA to literally lead the way out of the current mortgage mess, we can expect the pressure to be on FHA to expedite approval of TOTAL Scorecard interfaces to all the newer high-powered AUS systems out there in the market today.

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