As the mortgage crisis widens, particularly with the latest news regarding limited liquidity, it makes sense to wonder if correspondent and wholesale lending will be the next to go.
We’ve already seen a large number of mortgage lenders shut down over the past couple years, and with the secondary market becoming even more dismal, we’ll likely see more casualties in the very near future.
And as the pool of wholesale mortgage lenders and correspondents dwindles, mortgage brokers may feel that they’re being squeezed out of the market.
Couple that with impossibly tight underwriting guidelines and you’ll see mortgage brokers voluntarily walking away from the job.
Mortgage brokers accounted for a large chunk of loan originations during the mortgage boom, though they also provided a good amount of fraud and predatory lending along the way.
It’s not to say that mortgage brokers are dishonest, it’s just that the industry was in such a boom, and underwriting guidelines were so loose that the opportunity for fraud was extremely high.
The problem with mortgage brokers, loan officers, and correspondents is that they are far less regulated than larger banks and lenders, and simply present yet another layer of risk between the lender and the borrower.
If indeed the large banks and mortgage lenders continue to exit the correspondent business, it’s probable that brokers will have a very hard time competing.
And if brokers are still able to conduct business, there’s a good chance that their product mix will be limited to full documentation, conforming loans with near-perfect credit scores, which represents but a sliver of the population.
The fact of the matter is that big banks and lenders simply can’t take on the risk of allowing correspondents and brokers to originate and fund loans that may not meet quality standards.
In the past when the secondary market was strong, quality loans sold at a premium and even “scratched and dented” loans sold without delay.
But times have changed, and we may see correspondent lending, along with the wholesale end of the business fallout in favor of clear-cut, retail mortgage lending.