Correspondent lending can be defined as an agent or packager selling mortgages on behalf of an originating mortgage company ‘ a role that has developed and been adopted by a number of packagers.
As the situation stands, if appropriate controls are put in place to ensure effective management, we believe the natural and substantial development of this market will be the creation of correspondent lending partnerships with high street lenders in the prime market. It has the potential to deliver meaningful solutions to UK consumers.
However, before such potential can be realised, key issues need to be addressed. One has to be sceptical about lenders who are likely to promote this offering as a ‘win-win’ scenario with the packager, lender, broker and consumer all benefiting.
More worrying is the potential mis-selling situation, in which correspondent lenders can control the fees from the outset through to completion. They could also enjoy the freedom to pay out procuration fees to introducers at higher levels than normally paid, in order to attract greater levels of support. This could lead to consumers being compromised. Individual customers with like-for-like mortgage applications could be treated differently.
It is possible, though not necessarily evident to the consumer, that the headline rate benefit that originally attracted them is eroded by the level of fees charged throughout the transaction. The consumer lobby and industry bodies will be watching this development closely.
That said, correspondent lending provides the platform to offer more exclusive terms. Products designed with the benefit of input from all interested parties should lead to a positive end result. Interest rates can be as much as 0.25% cheaper than the standard offering. This is achieved on the back of a more comprehensive process being undertaken by the third party and the economies of scale this brings to the lender.
The underwriting can be fully automated utilising technology links with the lender. This additional processing burden gives the packager control over the process and a proposition unique to its distribution, effectively creating quasi lenders.
While brokers should be wary of becoming involved in correspondent lending without due diligence, the opportunity exists to offer a competitive product more closely tailored to customers’ requirements. If the product offerings are structured and managed appropriately it represents a positive development in the marketplace.
Martin Maynard is managing director at Mortgage Next