Aug. 31, 2011, became a date worth remembering when Charlotte, North Carolina-based Bank of America (BofA) announced its intent to sell its correspondent lending division. * When the nation's largest bank announces it no longer wants to be in a niche that previously constituted nearly half its total output in residential lending, an industry tends to sit up and take notice. * When that announcement is prefaced by the bank's earlier decision to shutter two additional mortgage lending divisions (wholesale and reverse), folks do more than take notice. * Maybe it was the Keynesian "animal spirits" in motion or perhaps it was simply an idea whose time had come--but the dominoes began falling. * Over the ensuing year, numerous other mortgage lending behemoths--San Francisco-based Wells Fargo & Co. and New York-based MetLife Inc., to name just two--made similar announcements. * Speculation heaved regarding the motivation behind their exits. Perhaps they are simply biding their time until the market returns to more favorable conditions. More likely, the risk-retention rules and capital-requirement issues surrounding Basel III have made mortgage lending a less-attractive endeavor.
In a textbook case of pure economics, an inexorable drain has begun from what appears--to bigger lenders, at least--to be an imprudent business model.
Regardless of their rationale, large players' exodus from the correspondent channel has created a vacuum that small to midsized players are eager to fill. Most of the companies entering the market have traditionally placed their focus on retail or direct-to-consumer, with some wholesale experience in the mix.
These smaller companies have started developing their correspondent platforms quite quickly to take advantage of the gap in the market, with mixed results.
Current market trends are extremely favorable for lenders seeking to expand into correspondent lending. Current pricing, the spread of the markets (particularly on certain products) and a resurgence of jumbo lending over the course of the last several months have all combined to create a correspondent environment ripe for selective picking.
We're seeing new entrants launch production, hire additional sales folks and put together specific fulfillment platforms to accommodate these products. Others are developing core competencies internally and outsourcing their pre-purchase file review--all of which is a boon both for the industry at large and the preparation for the imminent resurgence of a private securitization market.
While Continued market restrictions are of most immediate concern, the elections impose another uncertainty in the marketplace, particularly when considering their current and continued impact on the prioritization of congressional work. Whether the market itself is artificially or organically driven, some of the moves that federal agencies are making, and the rumors around what may or may not be changing, are in essence forcing the industry into a holding pattern until early 2013.
Credit restrictions put in place between 2007 and 2010 by investors and agencies remain in place. The following factors are also having a cumulative effect on the market:
* Additional overlays by lenders/investors;
* An overall slowdown in approval process by agencies;
* Net-worth requirement increases (real and proposed);
* Multiple guarantee-fee changes;
* Agency master maximum volume enforcement;
* Basel III capital requirements;
* Risk-retention rules/Qualified Residential Mortgage (QRM); and
* Ability-to-repay rules/Qualified Mortgage (QM)
Over time, all of these measures will work to discourage market entry and growth. Layer upon layer of changes, framing a new industry paradigm that's not quite in focus yet, ensure that 2013 and 20 14 will be very interesting indeed.
However, the silver lining to all of this potential market restriction is that it may push the private market more quickly to reinvent itself or look toward I other solutions, such as refined and renewed mortgage participations.
Looking at the current Mortgage Bankers Association (MBA) forecast, mortgage origination volumes are expected to decrease over the next year and rates are expected to edge slightly upward, as is the 10-year Treasury yield. Thus, it would seem, regardless of who holds office come January 2013, the mortgage market will retain its current challenges for the next 12 or more months.