A new delivery vehicle to bring mortgages to Wall Street makes its debut today.
After seven years spent researching, structuring, and securing funding, Emil Lau, chairman and chief executive of Lau Capital Funding, Los Angeles, is ready to do business. The former Bank of America vice president is expecting $5 billion in loans to flow through Lau Capital in the next 12 months.
The company intends to provide warehouse lines of credit directly to mortgage brokers. When a closed loan is awaiting sale in the secondary market, a third party disburses funds to the originator, who can then make more loans.
Mr. Lau presented the concept of warehousing for brokers to Bank of America when he was there, but the bank didn't see it as necessary, so Mr. Lau took his idea on the road.
Along with executive vice president Elsa Martinez, a former Bank of America colleague, and chief financial officer Fred Barnes, Mr. Lau spent several years building up a network of mortgage brokers and takeout, or end, investors.
"This is an underserved market," Mr. Lau said. The company already has more than 55 investors lined up, and 2,000 approved brokerage companies.
Fleet Bank, Bankers Trust, Deutsche Bank, J.P. Morgan Investment Co., and Merrill Lynch are among the investors signed up to buy the loans, replacing the warehouse credit.
Mortgage brokers involved have volume ranging from as little as $25 million in annual originations to $700 million.
Through the Lau origination system, they will have access to funds for conventional, jumbo, home improvement, and second-mortgage loans. Brokers may also offer homeowners lines of credit using the Lau system.
Brokers are held responsible for loan quality, and must repurchase loans that default. They must also provide for property appraisals and prequalify borrowers.
The end, or takeout, investor, performs a thorough credit check on the borrower, approves the application and commits to purchase the loan. Once the investor has made a commitment, Lau funds the loan.
The investor will begin to service the loan as soon it is warehoused by Lau, to begin generating income even before ownership.
Mr. Lau has built his network by handpicking broker companies, meeting executives face to face, and demanding quality. Only 1% or 2% of mortgage brokers will meet the Lau network criteria, he said.
"What's warehoused with us is the highest end of their product line," he said.
High-quality management is an important commodity, he said. "When you sign a correspondent agreement, it has to mean something."
Title insurance companies and closing agents will also need the Lau stamp of approval before they can be involved. With the mortgage broker method of origination, there is always a potential for fraud, Mr. Lau notes. "That's why it's not easy to do business with us."