Correspondent lenders can serve as an extra layer of business for mortgage brokers if you understand the business model. Unlike mortgage brokers, correspondent lenders originate and fund loans under their own brand. They typically have an underwriting staff and use their own money to fund the loan, then they sell the loan on a secondary market. This is where, as a mortgage broker, you can capitalize on another company’s efforts without needing an underwriting staff or a large bankroll for funding and originating loans.
The Benefits of Working With a Correspondent Lender
Correspondent lenders aren’t interested in holding long-term debt instruments. They don’t have a banking mindset. It’s true that ongoing debt repayments can be a good source of income for a mortgage lender, but the correspondent lending business model is not designed to manage that kind of portfolio. Rather, they are more like house flippers as opposed to landlords. They may build the loan “from the ground up”, but once the “construction” of the loan is complete, their interest is in selling it and recouping their investment plus their profit.
Since the correspondent lender is not in the business of taking mortgage payments, they want to unload a loan as soon as possible and reduce their holding costs. The longer they hold a loan, the less liquidity they have to fund new ones. Therefore, they are willing to sell the loan at a “discount” in order to profit from the investment in the short term and fund more loans.
For a mortgage broker, working with a correspondent lender means not having to find loans on the open market. If you develop a relationship with a correspondent lender that regularly underwrites and funds mortgages, you can have a steady source of ongoing income and reduce your marketing expenses.
Tips for Working With Correspondent Lenders
Scotsman Guide conveniently has a search engine you can use to find a correspondent lender in your state. What do you once you find a lender/sponsor? How should you evaluate potential correspondent lenders who want to warehouse the loans to you? Follow these tips to make the most of your relationship with a correspondent lender:
- What is the Lender’s Specialty? – Every correspondent lender is different. Some may specialize in subprime lending while others stick with prime. You want a lender who specializes in the same or similar types of loans that you deal with at your brokerage. For instance, if your mortgage brokerage specializes in commercial real estate, then you should look for a correspondent lender that does a fair amount of business in that niche. Otherwise, you may find yourself not buying many loans from that source.
- How big is the lender? – Some mortgage brokers have transitioned their businesses into mini-correspondent lenders. Ideally, your correspondent lender should be larger than your mortgage brokerage. At the very least, they should be large enough to supply you with enough loans to make your relationship with them sustainable. Remember, you’re looking for a steady supply of capital.
- How long have they been in business? – If you’re a new mortgage broker, you might benefit from establishing a relationship with a new correspondent lender, but your best bet is to develop a relationship with a company that has a track record of success.
- Don’t forget about risk assessment – Yes, a correspondent lender will perform a risk assessment on every property investment they fund as well as the borrower, but you should do your own due diligence. Take a look at the underlying investment and ask if the asset is worth the purchase price of the loan. Consider the loan-to-value in light of the cost of the debt instrument to your brokerage. You may get the loan at a discounted price, but if the underlying asset is overvalued for the loan amount, then it’s a risky venture.
It’s perfectly acceptable to develop a relationship with more than one correspondent lender. Make sure to properly vet each lender, as well as the individual loan, appropriately. If you are looking to learn more about correspondent lending and how it can benefit you, check out our Shareline program, the most flexible, cost-effective, technology enabled solution on the market.