Enlarge This ImageThe race for the exits is intensifying among big banks that purchase mortgages from correspondent lenders, creating liquidity issues for loan originators and radically reshaping mortgage servicing.
Citigroup Inc. told correspondent lenders this month that it will no longer purchase "medium or high-risk" loans that could result in buyback requests from Fannie Mae or Freddie Mac. That pullback comes after giant loan buyers Bank of America Corp. and Ally Financial Inc. pulled out of the correspondent channel at the end of 2011, and MetLife Inc. exited all but the reverse mortgage business.
Lenders in the market say another big player, PHH Corp., has pulled back as well. The largest private mortgage lender is facing liquidity constraints and a probe into reinsurance kickbacks by the Consumer Financial Protection Bureau.
"This is not good for the world," says FBR Capital Markets analyst Paul Miller. "We already know the retail arms have shut down high-risk loans. If the correspondent channels take the same step, ouch!"
Brett McGovern, president of Bay Equity LLC, a San Francisco mortgage lender, says Citigroup asked him to take back about 20% of the loans that he had agreed to sell to the bank.
"The list [of buyers] is shrinking and not as robust as it was a year ago," McGovern says.
The reasons for exiting correspondent lending vary among the largest banks, and not all of them are pulling back: Wells Fargo & Co. remains the dominant player in the sector. But the other big companies' retreat has had a domino effect on the mortgage industry.
Tom Millon, chief executive of Capital Markets Cooperative, a Ponte Vedra Beach, Fla., company that provides secondary marketing services, says lenders are knocking on his door, "freaking out," and "scrambling," because there are fewer big bank aggregators to buy loans.
"Everyone is very conservative about credit going forward and one of the big culprits is the repurchase risk looking backward," Millon says. "Lenders are concerned about liquidity for their pipeline and there are not a lot of alternative sources of liquidity. … It's a dislocation, a disruption."
Matt Ostrander, chief executive of Parkside Lending LLC, a San Francisco wholesale lender that bypasses the large bank aggregators and sells loans directly to Fannie Mae, predicts that the shift in the marketplace is likely to get worse.
With fewer banks buying loans, sellers have to wait even longer for the buyers to review and purchase their mortgages. Those longer timelines can cut into profits, because lenders cannot turn their warehouse lines over as quickly and fund other loans.
"Some of these companies are getting crushed because they can't flip their loans quickly enough," Ostrander says.
Some lenders have been forced to lay off staff or have burned through their funding. Anthony Hsieh, the founder and CEO of loanDepot.com, an Irvine, Calif., online lender, says he recently closed a nascent wholesale division due to "thin margins" and the need to focus on retail lending. At one point, he says, it took Wells Fargo 38 days to review mortgages he was trying to sell, though that delay has since dropped to about 22 days.
"It can cause capacity constraints," Hsieh says.
But banks argue that the lenders can cause delays themselves, by not delivering a full loan package, or if files are incomplete or include stipulations.
