Many mortgage banking clients are telling me that they are continuing to experience delays in the loan purchasing process. It seems that there is a slight uptick in the refinance application process right now due to historically lower interest rates. This upswing in production along with the increased mortgage compliance requirements and investor overlays is clogging up the back room operations at many wholesalers.
There is a way around the problem, however, and that’s by selling direct to the GSEs. This idea is something that comes around for many in the industry when the purchasing process gets bogged down.
With this article I want to expand on the underlying logic for anyone considering the idea of obtaining GSE approvals and selling loans servicing retained. There are a couple of things that you need to be aware of from the beginning.
First of all, you must have a net worth of $2.5 million and have been profitable for the last 4 quarters. Keep in mind that this doesn’t include the pending interpretation of risk retention reforms created by the Dodd-Frank Financial Reform Bill. What risk retention reforms I hear you ask? The Dodd-Frank Bill is creating a pathway for operations in the financial services arena for the future. The road, however, is only at the base level, it needs to be paved. That job has been left to the individual industry regulators who have, from the date of the bill’s passage, 270 days to develop, write, publish and submit for comment the final regulations that will govern the mortgage industry in the foreseeable future. Basically, the MBA’ summary states:
Section 941 “Requires federal banking agencies and SEC to jointly prescribe rules requiring securitizers to retain economic interest of at least five percent of credit risk of assets they securitize. Regulations must include separate requirements for different asset classes, and may allocate the retention amount between originator and securitizer. HUD and the Federal Housing Finance Agency must participate in joint rulemaking process for residential mortgage back securities (MBS) risk retention requirements.”
It appears that the confusion to this plan arises with the exemptions to this rule.
So how does all this fit in with your decision to sell directly? It remains unclear how this would effect your decision to sell direct. There is the potential for additional risk.
What we are seeing is a change in our lending environment. While rates are low and loan servicing will probably stay on the books for an extended period, servicing values may not be as aggressive as they were in the past. And because of the unrelenting issues over the last couple of years, major investors have substantial credit overlays that incur pricing adjustments and create a whole additional set of reps and warrants. Often times, the GSE’s pricing adjustments are less expensive than those of the major investors.
So what are some good reasons to take the plunge into selling direct?
Increased leveraging of your warehouse lines of credit. Typically the GSE’s take as little as three business days to purchase loans, meaning, if you can turn your line 7 or 8 times a month, it equates to increased closings, more profitability.
Less Loan Level Pricing Adjustments. Bottom line, direct access means a cheaper LLPA grid and that, in turn, makes you more competitive than your counterparts.
Elimination of Investor Underwriting Overlays. That pretty much says it all. And a big one for owner/operators. Lately many mortgage shops are requesting loan approval on the loan before it is funded. Working with an Investor, even if you have a DU/LP loan approval, you still have to deal with the various credit overlays. Going direct, you can use that DU/LP approval and feel more confident that the loan will be purchased after funding. By doing this, you will have a reduction in fees that you can use to increase your competitiveness in your market.
All things being said, if you meet the requirements, it may be a solution to delays with Investors, eliminate unnecessary costs and make you a leaner, meaner, more profitable shop.
Keep in mind that along with dealing direct comes a good in house quality control program that has a strong mortgage auditing and mortgage compliance package as part of the QC plan. And that's were Quality Mortgage Services continues to be the leader in the industry. Contact our Sales department today and set up your closed loan auditing review service.
Tommy A. Duncan is executive vice president of Quality Mortgage Services LLC. For answers to your QC and FHA questions, please contact Tommy at (615) 591-2528, ext. 124 or e-mail [email protected]
You may also visit Quality Mortgage Services LLC on the Web at www.qualitymortgageservices.com.