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The year 2016 has been a big year for the growth of correspondent lending in the non-agency mortgage space. Retail lenders have forged new relationships with non-agency correspondent lenders in order to access new products and grow their market share. In simple terms, correspondent lending is a relationship between lenders and mortgage originators in which the lender has the ability to approve the loan before selling it on the secondary market. Unlike mortgage brokers, correspondent lenders originate, fund and brand mortgages in their own name. They also oversee the disclosure and approval process. As with most originators, a warehouse lender is often relied upon to provide short-term financing until the mortgage is sold on the secondary market.
Following the Great Recession, warehouse lenders tightened standards and rejected nearly all non-agency and non-QM loan applications. Recently, however these financers have become more accepting of non-agency mortgages, as they’ve seen a resurgence in originations. Increased volume helps validate non-agency lending as a more liquid market and one that warehouse lenders can take advantage of.
What has been the primary factor in warehouse lenders’ new found acceptance of non-agency loans? One word: Performance. The performance of today’s non-prime/non-QM loans have far exceeded expectations. This has been the key driver to demand and increased liquidity in the investor world. Ultimately, warehouse lenders need to have confidence there is a market for loans being put on their lines and that the market will continue to grow. It’s easy to understand why performance has been so strong. All loans are manually underwritten and are required to meet the ability-to-repay standards set forth by Dodd-Frank. With borrowers also making down payments, the final key of “skin in the game” has proven these loans to be extremely sound.
The correspondent channel is a good way for lenders to grow their market share because it allows them to expand their product offering and access a larger share of the mortgage market. It gives them a means by which they can branch out into the non-agency or non-QM mortgage market while retaining control on the lending process and relying on a trusted partner to underwrite and approve the loan. It’s also easy to make the switch to correspondent lending because the mechanics of closing the loan are nearly identical to the process they’re used to with Fannie/Freddie and FHA.
At Angel Oak Mortgage Solutions, we’ve seen an uptick in correspondent lending partnerships in the last few quarters as the housing market warms up to non-agency and non-QM lending. We anticipate growth in these products to continue accelerating across all lending channels. Borrower demand for non-QM loans still far exceeds supply, but we are now seeing lenders in the industry beginning to address that demand.
Tom Hutchens is senior vice president of sales and marketing at Angel Oak Mortgage Solutions, an Atlanta-based wholesale lender currently licensed in 32 states. Tom has been in the real estate lending business for nearly 20 years. He may be reached by phone at (855) 539-4910 or e-mail [email protected].
This article originally appeared in the October 2016 print edition of National Mortgage Professional Magazine.