Bank of America Corp. plans to return to a business it left four years ago: buying mortgages from correspondent originators.
The lack of a correspondent channel, a staple for most sizable mortgage lenders, is a major reason why B of A is not a bigger player in this business.
The Charlotte company's correspondent business will be run jointly by its consumer real estate division and its global corporate and investment banking unit. The goal is to take advantage of B of A's capabilities in both areas and provide each with more growth, Floyd Robinson, the consumer real estate head, and Pat Augustine, the global structured products head, said in interviews this month.
The needs of the mortgage business appear to be a big driver of the decision. Since taking over the home loan operations last fall, Mr. Robinson has said B of A wants to regain market share lost in recent years, despite tougher times now for all players.
B of A's first-mortgage originations fell 26% in the first half from the year-earlier period, while industrywide volume was relatively flat.
Many small, midsize, and especially nonprime lenders - along with Countrywide Financial Corp., the country's top mortgage lender - posted solid increases in volume. With long-term rates still low, the housing market sizzling, and product-hopping and equity-tapping popular, many lenders are finding ways to increase originations, even if fierce competition has cut into the business line's profitability and underwriting discipline.
Mr. Robinson called the correspondent channel "another lever" B of A can use "to react to what's going on in the marketplace." He pointed out that correspondent lending generally makes up roughly a third of large rivals' originations.
Market opportunities, including price competition, would determine the share of B of A's production that comes through the correspondent channel, he said. Still, "my sense would be that over some reasonable period of time, you would see some reasonable distribution of our origination activities in correspondent."
Mr. Robinson said the channel, which he thought would be a natural to create soon after taking the job, would also let his company do more in an area he had said in previous interviews he is targeting: alternative-A or other near-prime loans.
"That doesn't mean we wouldn't look to prime, jumbo, et cetera, based on what the economics of that activity would be," he said.
He reiterated that B of A is not looking to reenter subprime lending, another area it abandoned in 2001. By near-prime, he means loans to borrowers with FICO scores of 620 to 680.
The correspondent channel would be a conduit for B of A's securitization business, Mr. Robinson said, though at some point it could also provide a source of assets to put in the company's portfolio. It should be up and running by mid-2006.
Mr. Augustine said B of A's securities arm would continue to buy pools of mortgages without the servicing rights.
He expects the new channel to "significantly increase the amount of business we are doing with our investor base" - the dealers and others who buy fixed-income products from B of A.
The growing complexity of mortgage offerings, underwriting options, and consumer demands provides even more reason for securitizers to step closer to the primary market, Mr. Augustine said. With all the "evolution" on the product side, a securitizer that works closely with originators can give them insights that help them create loans that rating agencies and investors value most, he said.
Also, "the tighter you can get with that information to the origination side of the business, I think, the better you will be at the origination business," he said.
He also acknowledged that reaching past intermediaries is becoming more important to securitizer profitability as the number of securitizers going to the primary market swells.
B of A's mortgage division would service the loans bought from correspondents, the executives said. It would deal with all aspects of acquiring loans - such as product creation, pricing, and processing - and the securities division would sell them as structured products.
When B of A left the correspondent business in 2001, a spokeswoman said it was more interested in "growing relationships" with consumers. That stance was probably a nod to the fact that borrowers have looser ties with lenders that buy closed loans than they do with the lenders that make the loans.
This month Mr. Robinson said the customers B of A acquires through the correspondent channel would be just as valuable as others, since the servicing would provide a platform for deepening the relationships. "I don't think the cross-sell to this group of customers would be any different than any other customer base that we have."
When B of A quit the correspondent business it did not waive its fees for home equity lines and first mortgages for existing customers, he said. (It started doing so only in the last year; new customers are still charged the fees.)
A former executive of a lender that was selling servicing rights to B of A through the correspondent channel when it was shuttered said there appeared to be a more concrete impetus for the decision to leave the business. A sharp drop in rates right before then, and the need to record accounting losses on some purchases it had committed to, helped push B of A out of the business, said the source, who asked not to be named.
B of A would not address those remarks.
Given its size, it could be a formidable competitor to other buyers of correspondent loans. It will purchase whole loans with the associated servicing rights. It plans to buy the loans only in bulk at first, but later it will start buying them one by one. It will offer correspondents both best-effort and mandatory-delivery contracts.
Among the top lenders and others, there have been different views of the correspondent channel. One of the channel's main appeals for the largest lenders is as a way of acquiring servicing rights. It can also provide warehouse-lending opportunities at a time when many brokers are becoming mortgage bankers.
Washington Mutual Inc. has said it is taking a guarded approach to the business, but Countrywide has maintained a strong correspondent channel. And several small and midsize lenders have moved into the business in the past year.
Meanwhile, the Wall Street firms that traditionally focused on buying loan pools in the secondary market have been ramping up their work with third parties in recent years, both in funding loans through brokers and buying them from correspondents. Among those firms Lehman Brothers, which runs the biggest securitization conduit, is having the most success in taking part in loan originations. Its Aurora Loan Services is the No. 14 originator over all.
Mr. Robinson, who also runs B of A's consumer insurance business, said his unit will run the correspondent operation out of an existing center, and has begun hiring. He would not say how many employees it will add, what kinds or how many correspondents it will sign up.
Mr. Robinson has been remaking its mortgage operations, by reengineering processes, focusing on more nonconforming products, and strengthening relationships with builders and real estate agents, among other things. He also closed two businesses he saw as peripheral: a mortgage technology unit and an outsourcing joint venture.
Executives from Wachovia Corp. have talked about a similar desire to align the size of its mortgage business with its overall heft. They have called long-term growth in the business more important than short-term profitability.
A spokeswoman for Wachovia, which got back into servicing last year, said Thursday that it expects to expand its correspondent business as a result.
