Participation In Secondary Market - Part Two
By: Paul Pouliot
Defining Different Levels of Participation
There are several levels of participation in the secondary market that provide access to this opportunity with differing duties, risks and profitability. The types of participation include: Referral, Wholesale, Correspondent, and direct to Government Sponsored Enterprises.
Under a “Referral” relationship the lender simply gets a mortgage request and is responsible for the completion of the application and forwards it to the Aggregator who performs all the duties such as disclosure, processing, underwriting and closing of the loan. The Aggregator funds the loan closing.
With a “Wholesale” relationship the lender is responsible for the processing and initial disclosures. In most cases the underwriting is done by the Aggregator after the complete file has been processed. The Aggregator will fund the loan closing.
The “Correspondent” relationship is for capitalized lenders who want to take control of the entire loan process from initial disclosures, processing, underwriting, and funding the closing. The loan is shipped to the Aggregator for purchase if it meets their criteria. The Aggregator in this relationship may offer “delegated” underwriting versus “prior approval” to the lender which means the loan will be immediately purchased and afterwards be subject to quality control testing and review to assure compliance to the Aggregator policies and guidelines.
Since both wholesale and correspondent relations have a servicing released component, you must first consider whether you are satisfied releasing you borrower to someone else or not. For servicing released products you will be paid a servicing released premium. It may be paid as part of your premium or as a separate fee. This premium can be recovered by the purchaser of your loans if the loan prepays early. Review in your contract the period in which you may be subject to this provision.
Types OF Available Delivery Commitments
There are typically two types of delivery commitments used in the mortgage banking industry: “Best Effort” and “Mandatory”.
“Best Effort” commitments used most often in “Referral”, “Wholesale” and “Correspondent” relationships are borrower and property specific. This means that if the property fails to be approved, the lender cannot substitute another property for the borrower. The commitment is for a specific property, loan amount, interest rate, term, and specified time.
In a “Mandatory” commitment, the amount can be loan specific or an aggregate of a number of loans that are within a specific range of interest rates and terms.
The potential profitability increases as the lender assumes more of the role and duties required in participating in the secondary market. The level of risk escalates also as you assume more of the role. For the most part, all of these options will offer rate locks for the borrowers under a “best effort” delivery commitment.
Dealing With The GSES Directly
Finally, the Direct relationship with the Government Sponsored Enterprises (GSEs). This relationship will offer the lender better pricing, the option to take down delivery commitments for a wide variety of terms, commitment periods, and a choice of the type of commitment (Best Effort or Mandatory commitment). Under this relationship the lender is in full control of the entire process from application, initial disclosure, processing, underwriting, taking delivery commitments, closing and funding the loan and delivering the loan to a GSE.
Under this relationship you can apply for an approved “Seller”, “Servicer” or “Seller/Servicer”. The major difference is the amount of capital required and the ability to service loans for the GSEs regardless of whether you ever plan to service. There are also financial conditions which must be met on an ongoing basis.
The truth is that our finest moments are most likely to occur when we are feeling deeply uncomfortable, unhappy, or unfulfilled. For it is only in such moments, propelled by our discomfort, that we are likely to step out of our ruts and start searching for different ways or truer answers. M. Scott Peck
With each step one takes, there is risk. Most times the risk is based on not being prepared. Preparation comes in many forms such as having the right training, the right systems and the right policies and procedures crafted and approved by your company/financial institution.
If you decide that you wish your entity to join in the secondary market arena, which distribution channels do you want to participate in? Typical distribution channels are Retail, Wholesale, Correspondent and Inbound. You can participate in one or a multiple of these channels understanding that each has its own risk. You may be able to have differing costs to produce a loan under each scenario which could reduce overall operational costs thereby improving your profits.
Establish the strategic goal for your entity by determining amount of available capital, talent that can be acquired, investment in systems which may get outdated over time, and demand for your services.
Wanting to take the next step? Spillane Consulting Associates Inc is here to help you reach that strategic goal. To perform a targeted assessment, contact Bill Dolan, Director at (617) 694-2617 or visit our website at: www.scapartnering.com
