Monday, December 6, 2010

Could Correspondent Lending Disappear?

Every rose has a thorn.  For mortgage brokers, the ability to originate FHA loans without having to meet net worth requirements was like receiving a gift of two dozen roses in a beautiful vase direct from David Stevens and HUD.  Unfortunately, at the same time, HUD handed a basket of thorns to those companies who had been previously originating FHA loans as correspondent lenders. 

HUD made a lot of changes to the FHA origination process this year including raising the net worth requirement for lenders from $250,000 to $2.5 million.  Lenders who cannot meet the new net worth requirements need a sponsoring lender in order to basically originate as mortgage brokers.  Since the net worth requirement was eliminated for mortgage brokers, that opened new opportunities for really small players, but at the same time it reduced some solid correspondent companies who had been originating these loans successfully to the same status as their poorer, tinier counterparts.

To appreciate what a real can of worms this opens, think about the changes to the mortgage broker community this year.  We now have the SAFE Act which requires individual national licensing for each loan officer with additional requirements added in each state where that loan officer works.  We have the new Federal Reserve compensation rule which goes into effect April 1 which says that employees of mortgage broker shops and the mortgage broker shops themselves cannot be paid yield spread premium.  And, as I wrote last week, HUD has now published a notice for comments regarding the workings of warehouse lines.

With all of this in mind, the Mortgage Banker Association wrote a letter to the leaders of the House and Senate asking them to pass legislation that would prevent the new FHA rules from disallowing table funding and correspondent lending for FHA.  MBA's letter states, "Lenders rely on the efficient process of allowing qualified correspondents to close loans in their own names in order to serve all markets effectively. If correspondents are unable to close loans in their own name, many of them will cease to offer and originate FHA products, thus reducing the availability of safe and affordable mortgage and refinancing options for  low to moderate income and first time homebuyers."  MBA is asking for immediate action from the House and Senate since the new rules go into effect on January 1, 2011.  But with Congress wrangling over taxes and and unemployment benefits and trapped in a lame duck session until January, the chances that anyone in Congress is going to look seriously at this issue before the end of the year seems pretty slim.

While MBA's prediction that HUD's new view that there are only lenders and brokers will affect access to FHA is undoubtedly true, there is so much more at stake here than just access to FHA mortgages.  If the Treasury rolls out a government-insured model similar to FHA for all mortgages, as I believe they will, in January, then we can look at what HUD has done with FHA as a model for all mortgage origination.  Like Cinderella, we can all go to the prince's ball, if we can meet all of the conditions for licensure, if we survive supervision by the Consumer Financial Protection Bureau and if we can figure out how to run our offices with greatly reduced compensation.  So what seemed at the outset to be a wonderful gift is really just the beginning of the end for a large segment of our industry.

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