The list of good ideas gone awry in the mortgage industry is a rather long one.
A classic example is the 125% loan-to-value ratio product, which started as a private version of a Federal Housing Administration product known as Title One. The idea behind the original product was to give buyers extra cash to fix up the property they were buying. The 125% had no such restrictions.
The product’s rapid ascent in the 1990s was followed by its equally rapid downfall as investors began to realize the rather risky nature of lending more than what a house is worth.
Subprime lending in the early days had tight controls, with pricing appropriate to the risk and very proactive servicers making sure the borrowers were able to make the payments. As competition grew, companies took more risks and the sensible underwriting of these loans went away.
Option (or pick-a-pay) adjustable-rate mortgages even have a proper place in the market. But a product intended for the safest of safe credit borrowers was being offered to anybody and everybody in order to qualify them to buy a house.
The latest hot item in the mortgage business is the mini-correspondent channel. When it is done right, with the proper controls by the investor, it is a legitimate way to create mortgage servicing rights. The lender is able to acquire the MSR associated with the loan at a lower cost than from a brokered loan or a loan originated by the retail unit in their own shop.
But it seems everybody is now jumping into this space, both on the aggregator side as well as the originator side. There are many mortgage brokers who see the channel as a way to avoid disclosing fees because it is considered a true secondary market transaction. A large number of these firms lack the proper infrastructure in their back offices to be responsible for a line of credit.
Many lenders are jumping into this space, seeing the opportunity to gain market share to counter the refinance market drying up. Thus they are not pricing the loans commensurate with the risk.
To put it simply: Not every mortgage originator is capable of closing loans in its own name. And not every aggregator has the proper controls in place to make sure the mini-correspondents they are buying from are capable of closing in their own name.
The growth of mini-correspondent recalls the growth of the wholesale channel and of net branching. There were too many people willing to sign up any and every mortgage broker to be a wholesale originator or become a net branch for the organization without properly vetting them.
Lenders and originators, and most importantly, consumers, paid the price when the inevitable happened and these firms went out of business. With proper controls in place, the mini-correspondent channel can avoid joining the list of good ideas gone wrong. But is it too late?
Brad Finkelstein is the originations editor for National Mortgage News. The views expressed are his own.