Last week, I told you about an interesting compliance-related strategy that some mortgage brokers are considering that they hope will help them stay within compliance guidelines without having to limit their incomes to 3% or less of the loan amounts they write.
A move from broker to mini-correspondent brings with it a lot of changes. Instead of originating and funding loans in the name of their wholesale lenders, mini-correspondents close the loans in their own name for a single wholesale lender, who then re-underwrites and conditions the loan for sale into the secondary market.
There are quite a few advantages the originator can enjoy by pursuing this course of action, but there are also some disadvantages.
First, brokers that become mini-correspondents will incur additional expenses related to obtaining and maintaining a warehouse line of credit, which they’ll need to fund their loans. Not only will they owe the interest charged on each loan they fund, there is also typically a per use charge with these lines. If the deal doesn’t flow smoothly through to the wholesale lender, the originator could incur late payment penalties. Finally, the originator will have to hire and train someone to manage and track the activity related to the warehouse line.
Secondly, originators who choose to go this route will be subject to higher net worth requirements than mortgage brokers (ie.-FHA approved lenders need a $1,000,000 minimum net worth). While there are ways to get these funds, it fundamentally changes the nature of the originator’s business.
Finally, when the broker originates a loan for a wholesale lender, they don’t typically have any repurchase risk. If they do, it’s limited to the revenue they would have earned on the loan. But when they close the loan in their own name for later sale to the wholesale lender, they open themselves up to serious repurchase liability. If there has been a significant change in loan conditions (ie—borrower loses a job, borrower incurs more debt, etc.) the originator may be required to repurchase the loan or correct the default.
As the new rules continue to take effect, we expect to see more originators pushing the boundaries of their businesses in an attempt to find the best way to stay profitable in the new environment. Some of the people operating here are very creative. I’ll let you know what they come up with as I run across it.