Lehman Brothers Inc., ever in search of new sources of jumbo loans for its securitization business, has opened a correspondent channel that gives it access to loans originated through the Internet.
Through a partnership with HomeAdvisor Technologies Inc., Wendover Financial Services, and Freddie Mac, Lehman is buying jumbo loans of up to $650,000 as well as some subprime products. It will pool the loans into securities.
The partnership illustrates the growing role of investment banks in the secondary mortgage market - especially for nonconforming products that Fannie Mae and Freddie Mac cannot buy.
The partnership also is another step in the development and influence of HomeAdvisor, the joint venture which is majority-owned by Microsoft Corp. and whose equity investors include Freddie Mac, Chase Manhattan Corp., and General Motors Corp. HomeAdvisor can now handle the whole spectrum of mortgage products, not just conforming loans.
Wendover is originating the loans through HomeAdvisor and is processing, closing, and funding them using Lehman's underwriting and pricing models. Freddie allowed Lehman to reconfigure Loan Prospector, the government-sponsored enterprise's popular automated underwriting program, with Lehman's models. This helps Lehman buy the jumbo loans from Wendover in much the same way that Freddie Mac buys conforming loans from lenders using HomeAdvisor.com.
Freddie has also provided the partners technology to automate the property evaluation process and help streamline the documentation process to originate the loans.
Jon Voitman, senior vice president on Lehman's mortgage trading desk, said Lehman began buying the loans at the end of last month and currently has a full pipeline of loans coming through the channel.
The partnership differs from the way he typically buys whole loans for securitization, because Lehman can embed its underwriting and pricing models into the process, he said. This enables Wendover to avoid some of the risk of underwriting loans through a traditional model, where it would have to interpret Lehman's guidelines and hedge its purchase, he said.
In addition, by integrating its underwriting guidelines with Wendover's system, Lehman buys loans of consistent quality, Mr. Voitman said. By making sure it places high-quality loans in the pools of mortgage-backed securities it issues, Lehman enhances its profitability with investors, he said.
A Lehman spokesman said the company will also gain from Wendover's name recognition as a strong retail brand without having to build the bricks-and-mortar retail outlets to produce loans.
Mr. Voitman said that Lehman will purchase jumbo and subprime loans, but the majority of the loans will be jumbos. Though it is difficult to project the volume of jumbos Lehman will buy, the new program "will be very valuable," he said.
Lehman, one of the top jumbo securitizers, will securitize $30 billion of nonconforming loans this year, the majority of which were jumbo, he said.
To be sure, Lehman faces a major hurdle in the new venture, as many companies have had trouble originating loans over the Internet. Consumers have been slow to adopt the online mortgage process, preferring to research online but close the loan offline, where they receive the human contact and hand-holding that some analysts say is key to the process.
Mr. Voitman, however, said that Wendover contacts prospective borrowers over the phone when they apply for a loan, giving the new venture the "combination of high-tech and high-touch that makes the system stand up" and enhances the consumer's experience.
In setting up the program, Lehman, Freddie, Wendover, and the ratings agencies worked hard to streamline the documentation process required to originate the loans, making it "less intrusive" than the traditional approach, Mr. Voitman said. Wendover will collect less information from borrowers, and it has automated many parts of the process, such as income verification, he said.
Buying loans originated on the Internet also lets Lehman avoid concerns over securitizing loans for companies that have been cited for predatory lending.
In March, Lehman came under fire for underwriting mortgage-backed securities for First Alliance Corp. of Irvine, Calif., which has long been accused of predatory practices.
A spokesman for Lehman said that, while the partnership's purpose is to generate jumbo loans for securitization, if at the same time it can address predatory lending concerns, it is "terrific for both us and the borrower."
The partnership "should address any concerns that people have, because loans would be originated to our specifications, so we would have control over the loans we purchase," the spokesman said. In addition, Internet-originated loans do not involve salespeople, who in predatory scenarios typically try to push borrowers to take out loans they cannot afford, he said.
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