You may have heard a lot about correspondent lending without knowing exactly what it is. Given the process largely concerns the back-room administration of funding and packaging of mortgages the importance to mortgage brokers is perhaps debatable. However, there are certain advantages which filter down to the broker and ultimately their clients.
Looking at the size of the market in the US, where correspondent lending originated, this is a form of lending that is set to become huge. In the US, correspondent lending accounts for $400bn mortgage lending ‘ a third of the US market and some predict 30% of lending in the UK market could eventually be done in this way.
Not surprisingly given the relative youth of the market over here, there is confusion over what correspondent lending actually is. For the most part, correspondent lenders are packagers processing large volumes of mortgage loans who want to take the lending process in-house, but do not have access to the necessary funds to do so in their own right. They arrange with a lender to provide them with the funds to carry out that lending. This enables the funding lender to enter a specialist market.
However, as different agents tinker with the process of correspondent lending the definition gets blurred. There are those who say that true correspondent lending is when a lender allows the correspondent lender access to funds to design their own products and take the whole mortgage process from sourcing to completion in-house. The lender’s role is limited to providing the funds, providing underwriting and servicing the loan. This corresponds to the US model. In the UK, however, there is a more muted style of badged correspondent lending where the correspondent lender has to process the lender’s products. Hence the interpretations of correspondent lending vary depending on who you talk to.
In terms of the key operators in the arrangement, there are approximately 15 correspondent lenders currently in the market with more in negotiations with lenders. Key funding lenders are GMAC-RFC, Platform Home Loans and Preferred Mortgages. Lenders use a panel of correspondent lending partners. GMAC-RFC, for example, uses Genesis Home Loans, High Street Home Loans, Mortgage Lender and National Guarantee and is shortly to announce a new partner. Platform, which already lends to Genesis, is talking to National Guarantee and has two potential correspondent lenders with which it is negotiating. Preferred Home Loans uses Solent Mortgage Services and is in negotiation with others.
‘The more traditional UK-based model,’ explains Simon Biddle, marketing communications manager at Preferred Mortgages, ‘is where a lender places an underwriter in the broker’s office and the documentation is sent from there, either with the lender’s branding or the broker’s. At Preferred, we push the US model where we give bespoke software to the correspondent which they can use to design products to suit their individual marketing needs. Some are stronger in a specialist area and they can use this to design products.’
The difference is important in that it affects the amount of control the correspondent lender has, which is one of the main attractions of correspondent lending.
‘We believe a proper correspondent lender should be designing its own product range, not just a re-branded range,’ says Gary Forrest, joint managing director of High Street Home Loans. ‘We design, originate, process and complete the products. We have a pre-sale agreement in place, with a lender be it a building society, GMAC-RFC or whoever. We approach them and say ‘this is the product we want to launch, this is the lending criteria, do you want to fund it?’ We ask them to set aside allocated funds and we draw down on that money. We complete on the product and then transfer the title back into the lender’s name and the funding goes on to their balance sheet.’
Just to confuse the matter even further there is also a development called through lending. This is where the lender provides the funds for the correspondent lender or lends themselves but then transfers the loan to another lender, usually a building society. GMAC-RFC has just announced an arrangement with Leeds & Holbeck Building Society, for example, where GMAC-RFC originates the lending on two products currently available ‘ a fixed rate and a capped tracker mortgage. GMAC-RFC controls all the marketing and processing and legally completes the loan. Then, immediately on completion, it sells the mortgage book to Leeds & Holbeck. This continues a relationship established last year when it bought GMAC-RFC’s £50m buy-to-let mortgage book.
Why would someone want to work in the correspondent lending market? For a start the correspondent lender needs to be doing a significant amount of business, somewhere in the region of £20m-£50m. They should also have specialist operations, which are attractive to the lender. They enable the lender to widen their distribution in a particular market that it would otherwise be difficult for the lender to enter. For the correspondent lender, it can lend without having a large balance sheet and without having to secure loans in it own right. It gives them an increased status in the market and more control over processing and lending.
Gina Collman, head of corporate communications at GMAC-RFC, explains: ‘The market is typically focused on non-conforming lending. The lender needs organisations with operational facilities and that tends to be packagers concentrating on non-conforming mortgages. They are already sourcing references, instructing valuations and so on, so they have the infrastructure there.
‘It builds distribution for us. For the correspondent lender, it is an opportunity to make an entrance into the market under their own brand name, get a profile and increase distribution.’
Back to grass roots
But how important is the process of correspondent lending to the mortgage broker? Given that the arrangement is between the lender and the correspondent lender, the packager and the broker will have been doing business anyway so its importance to the broker is questionable. The argument is that given the cost effectiveness of the process to the lender and the opportunity it gives packagers to process business quicker, there could be advantages at the grass roots level. For the IFA or mortgage broker the advantage, according to the correspondent lender, is they get a better deal for their client in terms of product and service.
‘We strip out all the costs the building society would normally have in originating this type of lending and having a streamlined organisation. We can deliver very profitable, very beneficial products to the consumer because the margins are better,’ says Forrest.
Collman agrees: ‘It gives a good service to the IFA and the end user. The chain of the process is shortened because you are bringing the system delivery closer to the consumer so they should see the loan completed quicker.’
Calvin Cooper, sales director of Solent Mortgage Solutions, says: ‘When we package a product and it goes to the lender, we lose control to some extent. What we are doing is bringing control back by doing the lending in-house and completing more cases.
‘It is a better deal for the intermediary. What they want is a good mortgage at a good rate for the client. And it is still the IFA or mortgage broker who is responsible for getting a good deal for the client ‘ we are just providing the service.’
The cost effectiveness of the process also means the products on offer to the broker have better rates than if they go direct to a lender.
‘Correspondent lenders don’t have a high loan to value fee so there is a saving there for the consumer,’ says Guy Batchelor, sales and marketing director of Platform Home Loans. ‘The correspondent lender who was a packager or large introducer has a lot of purchasing power and we are prepared to give them different products. Correspondent lenders are not getting all of the best products just a variation of the consumer or broker benefits.’
A less tangible effect on the mortgage market is the potential for increased business. With more funds available, it could mean a better the deal for the mortgage broker and the borrower.
‘In the sub-prime sector, the more lending institutions, whether mortgage lenders or correspondent lenders, the better as they all add to the growth of the sector,’ says Batchelor. ‘The more we market in this area, the more awareness there will be in the adviser community and the more business there will be.’
A logical extension to correspondent lending would be beyond the sub-prime to the prime market.
‘I think it is a factor going forward that different forms of lending or parts of the market will be covered by correspondent lending,’ says Batchelor, ‘it’s only a matter of time before these correspondent lenders are looking for products outside non-conforming lending as they expand their products and their brand.’
Eventually we get to the impact on the mortgage broker and the borrower. ‘The broker gets a better deal because they can sell niche sub-prime products which are far more competitive than before,’ says Forrest. ‘We are already seeing sub-prime lending get closer to prime lending and it may get closer. Client retention is important, so a borrower starting off on one lender’s product, could eventually end up with a lender’s standard product as long as they maintain payments ‘ it is almost like credit repair.’
Stephanie Spicer is a freelance writer
Correspondent lenders provide the funds for packagers to launch their own loans.
By working with a correspondent lender, lenders are able to capitalise on markets that would otherwise be difficult to enter
Correspondent lenders typically focus on non-conforming mortgages