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TPOs Outperform Retail on Loan Performance

Robert Ottone
Nov 27, 2013

Third party-originations (TPO) have apparently been performing just as well as other forms of originated loans, according to Moody’s. The bad TPO loans, in particular, are from before the financial meltdown of 2008/2009. In recent years, there has been tighter control over lending regulations regarding TPOs, which could be due to a narrowing of the gap between loans and origination. This is good news for those looking to move TPOs over the coming months. "The narrowing of the performance gap between third-party and retail-originated mortgages is credit positive for newer residential mortgage-backed securities (RMBS), although economic stress could expose weaknesses in third-party loans that are not yet apparent," says Moody's VP Kathy Kelbaugh. The increased use of third-party fraud-detection tools has also given rise to a lender’s ability-to-pay closer attention to a potential borrower’s financials. For example, many originators, though not all, are purchasing only loans that a correspondent lender sources from its own retail channel and refusing to purchase loans that a correspondent sourced from yet another third party. The benefits of using a third-party tool is obvious, as there’s no actual skin the game either way, the third-party can remain impartial to whether or not an individual’s information is accurate or whether the individual is flubbing on their financials. “As much of a  reputational reprieve as Moody’s report  is for the TPO channel, the damage has already been done for the most part,” said John H.P. Hudson, vice president of regulatory affairs for Premier Nationwide Lending. “Ameriquest, New Century Mortgage, Washington Mutual, and many, many more all pushed sub-prime loans through their retail channels, yet, brokers were easy to blame. I’m not saying brokers were 100 percent innocent, I’m just saying they were a convenient scapegoat used by politicians, regulators, and media when explaining the debacle.” Looking at the cumulative default rates on Fannie Mae's and Freddie Mac's third party and retail-originated loans from 2000 to 2012, Moody's finds that recently-originated third-party loans have performed as well as, and even slightly better than, retail originations. Among loans originated between 2004 and 2008, third-party originations have defaulted far more frequently than retail originations.
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