Things are looking pretty good to Bruce Paradis these days. And if Mr. Paradis is upbeat, banks that sell mortgages on Wall Street are likely to be faring well, too.
Mr. Paradis is president of Residential Funding Corp., a company that functions as a conduit, gathering mortgage loans and packaging them for sale in the secondary market.
This role gives Mr. Paradis an extraordinary vantage point on the nexus between Wall Street and the mortgage industry.
Last year, the Minneapolis company - a unit of General Motors Corp. - issued $6 billion of mortgage-backed securities and collateralized mortgage obligations, more than any other company except for the federally sponsored agencies, Fannie Mae and Freddie Mac. Residential Funding's volume increased 33% in a year that saw overall mortgage securities volume slide by a like amount.
In return for supplying Residential Funding with a steady stream of loans, mortgage banks receive cash to make more loans or securities to serve as investments.
Industry observers say Residential Funding is truly a force to be reckoned with, and has been for a while. "They were the original conduit and set the tone for everyone else," said Allen Hardester, a mortgage consultant based in Columbia, Md.
The company's long-standing strength has been in jumbo loans - mortgages that exceed the $207,000 cap placed on purchases by Freddie and Fannie, Mr. Hardester said.
He said Residential Funding has been handling jumbo products longer than any other company and has kept its technologies on the cutting edge.
After coming off a successful year in 1995, Mr. Paradis again sees matters shaping up well for his company.
"We're doing more and more business with financial institutions," Mr. Paradis said. "They used to view mortgages as a product they would originate for their own portfolio. Now they originate for sale" into the secondary market.
Mortgage banks have also been diversifying, he said. "We've seen a trend where banks are offering a whole menu of mortgage products."
So-called B and C loans - those made to borrowers with tarnished credit histories - are becoming the hot items for banks and, as a result, for Residential Funding.
On reason is that the profit margins on jumbo loans - the raw material for the company's securities - have eroded by at least one-fifth in the past couple of years, Mr. Paradis said.
In Residential Funding's case, jumbo loans make up 70% of the company's volume but supply less than 70% of its profits, Mr. Paradis said. He declined to be more specific.
Mortgage banks are finding that B and C loans fill the void created by dwindling profits on jumbo loans. Through points and higher interest rates, banks "are finding better spreads" in these loans, Mr. Paradis said.
Because these products are ineligible for Fannie Mae and Freddie Mac pools, lenders turn to conduits like Residential Funding to take the loans off their books and gain liquidity.
Residential Funding supplies liquidity in another way. The company is among the largest warehouse lenders, providing mortgage banks with temporary funding for loans that are closed, but are still awaiting sale into the secondary market. This business has also become pressured, with large lenders finding alternatives to credit lines, and with many mortgage banking companies being absorbed by banks with their own credit resources.
Though he is upbeat about the coming year, Mr. Paradis doesn't dismiss competitive pressures. "There are still a lot of people chasing loans," he said. "It seems we're all working a lot harder to make the same profits that we were."