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May 19, 2011

Rumor Mill For Small and Midsize Mortgage Banks

May 19, 2011

Rumor Mill For Small and Midsize Mortgage Banks

Redwood Trust president Martin Hughes just told the Senate Banking Committee that “the illiquid private securities market would come back if the government winds down government-seized housing giants Fannie Mae and Freddie Mac.” Redwood was the only firm to securitize any non-Fannie/Freddie (aka Jumbo, aka non-agency) mortgage backed securities during the entire financial crisis. Click Redwood Trust tag below for more.

And here’s a rumor question from a small-firm mortgage banker: “Rob, I continue to hear rumors about rumors of large established correspondent investors possibly questioning their practice of buying closed loans from smaller lenders who are also buying loans through newly established correspondent channels. Is this true, and will it impact the market for us little guys?” As an answer, let me say that I have heard similar “rumors about rumors” but I have seen nothing definite come out of any of the Big 4 investors. That being said, it is well known in the industry that:

a) many smaller lenders have begun correspondent or mini-correspondent channels,

b) many of the 2nd or 3rd “tier” of investors/lenders are actively adding servicing or begun servicing their own loans, and

c) the value of servicing to these smaller institutions appears to be more than it is by selling it to the larger servicers.

Therefore, even if a smaller lender begins a correspondent channel to originate and sell loans, it may be to feed its own growing servicing portfolio and therefore a larger investor buying, or not buying, those loans may not be material.

For you “little guys,” it should have little negative impact, and in fact could benefit you if the mid-sized investors actually pay higher prices for servicing.

But keep in mind that investors, large and small, are focused on compliance, and the risks associated with failure to do so. The farther the end-investor/servicer is away from the loan source, the harder it is to monitor the entire chain of compliance, yet regulators will hold the end-investor ultimately responsible for the loan meeting all compliance guidelines.

We could spend days discussing where the liability rests when a loan goes bad or a class-action lawsuit arises after, “Investor A’s correspondent channel buys a loan from Company B, who bought it through its correspondent channel, who in turn agreed that it was in compliance with all rules and regulations but who funded the loan through its broker channel where the broker agreed that it was in compliance… and wasn’t.”

And remember – this is a rumor, nothing more.