TPO loans: born again.

Author:Peters, Andrew

During the high refinance volume years of 2002 through 2006, third-party origination (TPO) channels--wholesale and correspondent--took off as strong profit centers for mortgage lenders. If a lender didn't have a presence in TPO, it was likely planning to. The meltdown of 2007, however, changed that. [paragraph] Wholesale and correspondent lending quickly attracted negative attention. Lenders in these channels were accused by critics of casting aside origination standards for the sake of speed--placing lax underwriting at the heart of the subprime collapse. [paragraph] Today that negative perception is changing, spurred in part by the new approach taken by lenders who stayed or even entered the TPO channels when it wasn't popular to do so. [paragraph] Few segments of the mortgage industry have seen the extent of change witnessed in the TPO channels. Once the preferred channels of a great many lenders (especially wholesale), by 2009 they were among the perceived culprits for the subprime meltdown.

By 2011, a number of lenders specializing in these channels had failed and disappeared. Larger national lenders were also exiting as quickly as possible.

In spite of the tumult in both channels, some lenders chose to stay the course in either wholesale or correspondent lending (or both). Surprisingly, a number of lenders even chose to enter these channels between 2008 and 2012, in spite of the regulatory scrutiny and relatively low origination volume predicted.

Today the TPO channels are again poised on the brink of change.

Facing significant impact from the new Qualified Mortgage (QM) and loan officer compensation regulations, participants in the wholesale and correspondent channels nonetheless are cautiously optimistic. The basis for their newfound confidence? Redoubled efforts by lenders and investors alike on quality control (QC) and due diligence.

2007-2012: Change comes to the TPO space

Robert Rubin, managing director of Southfield, Michigan-based The Business Loan Connection, does not mince words when describing the fall of TPO lending. "For TPO lenders, everything went to hell in a handbasket between 2007 and 2010." he says.

"Warehouse lenders found themselves stuck with loans of less value. Correspondents found themselves stuck with loans with less value. Volume dried up for wholesale. In short, everyone got killed."

Indeed, while TPO lending--especially wholesale--had been the trend for lenders of virtually all sizes before the meltdown, many of the most notable names began to exit. The years immediately following the subprime meltdown brought the much-publicized departures of Wells Fargo, JPMorgan Chase, GMAC (now Ally Financial Inc.) and PHH Mortgage from the wholesale space.

On the correspondent side, it was Bank of America (BofA). Citibank and SunTrust that pulled out or significantly curtailed their activity. Of course, it wasn't simply the largest lenders that left the space. Many others left involuntarily.

A news release issued by Chicago-based mortgage marketing and research firm Mortgage Elements Inc. suggested that as many as 65 percent of all wholesale lenders and mortgage brokers closed...

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