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A growing appetite for table funding.

A form of wholesale lending known as table funding is growing more widespread. But a new HUD rule raises questions about how this popular form of lending may change in the near future.

Table funding is a response to market needs. By providing funds for originators at closing, it helps small firms whose warehouse credit lines are either nonexistent, or else too small to handle their loan pipelines. Providing funds in the name of the originating firms allows table funding to help them keep their identity within their local markets.

Yet, although its worth is proven to lenders, recent HUD regulations (under the Real Estate Settlement Procedures Act) that affect table funding seen as an obstacle to the ongoing growth of table-funding programs. But by the same token, recent guidelines established by the accounting industry encourage table funding. Lenders are allowed to amortize servicing-released premiums that they pay to originators, rather than expensing them in the current year.

Table funding is growing as more lenders discover that mortgage originators who lack any or adequate warehouse lines - particularly mortgage brokers, "provide a very valuable role in the mortgage process because they specialize in originations", says Don Bourland, senior vice president of Corinthian Mortgage Corp. in Overland Park, Kansas.

Table funding grew in use for many wholesale lending firms during 1992. Jacksonville's BancBoston Mortgage Corp., for instance, has seen its table- funded originations increase from $200 million in 1991 to $1 billion this year. But mortgage brokers could be less interested in table funding when the RESPA disclosure rules change on January 1, requiring borrowers to be informed in detail as to such payments to the mortgage broker as servicing-released premiums. Having to tell borrowers all the financial details of the deal when table funding "will cause me to get more aggressive in pursuit of credit lines", says William Schunk, president of National Standard Mortgage Corp. in Tarrytown, New York.

Currently about half of Schunk's business is table funded. National Standard has a $5 million credit line that wasn't adequate to meet this year's refinance business, thus causing more reliance on table funding. "As a general rule," he notes, "you get a better price if you use your own funds."

Lenders often seek to keep control of a transaction by insisting on preparing closing documents, Schunk adds. He complains that sometimes finds are wired the day before closing and the broker is charged for the overnight interest. Other times, the closing package arrives late, says H.A. (Tony) Davis, president of Preferred Mortgage Associates, Downers Grove, Illinois and of the National Association of Mortgage Brokers (NAMB). Such a development puts the originator in an awkward situation with his or her borrower. In a business where good customer service is essential, that can be awkward indeed.

Today's market

Additional regulatory matters other than disclosure and accounting also are affecting table-funding practices. "Some banks want table funding even if they have warehouse lines, so the loans are never on the books," reports Gene A. Barber, account executive at National Mortgage Associates in Oklahoma City.

Several large national lenders report that they are either not getting into table funding, or else not expanding their existing programs, until they are certain how the regulations surrounding the practice will be interpreted. But from the growing number of lenders who do offer table funding, following are descriptions of how they are using this financing tool.

Kislak's experience

In 1988, J.I. Kislak Mortgage Corporation of Miami Lakes, Florida "was not well-known," says Marvin Schwartzbard, executive vice president of loan production. "We saw an opportunity in table funding" to make a bigger name for the company, he adds. Kislak perfected its system in its south Florida base before offering the program more widely in 1989.

Kislak's initial public offering (IPO) this year brought the matter of capitalized servicing premiums to the accounting industry's attention. Previously the firm had used more conservative accounting techniques. But in order to allow its performance to be compared with publicly traded mortgage lenders, Kislak's financial statement was reworked in its IPO documents. Servicing-released premiums paid to acquire loans were capitalized for the previous year.

Instituting an accounting change in the financial statements caught the attention of the Securities Exchange Commission, which then asked the Financial Accounting Standards Board's (FASB) Emerging Issues Task Force (EITF) to rule on the accounting treatment. Out of that process emerged the current guidelines.

Today, Kislak offers three types of correspondent relationships. Under the first, originators "have their own warehouse lines, do their own underwriting and deliver closed, funded loans," Schwartzbard explains. Table funding is the second type of correspondent service provided by Kislak, and it accounts for the majority of the firm's total production.

Originators looking for funds will take applications, process them and underwrite loan files. "The correspondent takes the loan through closing," says Schwartzbard. Kislak re-underwrites the package, and after all conditions are met, the funds and supplemental closing instructions are sent to a closing agent chosen by the correspondent. Most of the lenders involved in this program are mortgage bankers, he adds.

Under Kislak's third correspondent arrangement, lenders without FHA delegated underwriting approval "who need the sponsorship of a mortgage banker" receive loan funds and closing instructions from Kislak staff, explains Schwartzbard. For the fiscal year ending September 30, Kislak originated more than $1.5 billion in loans. More than $1 billion of that total was table funded.

Kislak quotes one price to originators, which includes the servicing-released premium. However, the new RESPA disclosure requirements covering lender payments to mortgage brokers, slated to go into effect in January, may force Kislak to begin separating out its servicing-released premiums.

The amount of servicing-released fees depends on both loan size and the length of time that a rate is locked, Schwartzbard explains. Locking over a longer period reduces the amount Kislak will pay in servicing premiums.

Concurrent funding solution

"Most mortgage brokers want to avoid disclosure [of what the lender pays to them]," explains Maureen Townson, assistant vice president at Comerica Mortgage Corporation in Auburn Hills, Michigan. "Some are seeking warehouse lines" so they can fund loans themselves and thus not be required to break out their compensation as required under the new RESPA rule.

Comerica is considering offering concurrent funding to help those with limited warehouse lines, says Townson, by purchasing loans 24 to 48 hours after closing. "You can book more loans through the warehouse line that way, she explains. Comerica would review the closing papers to make sure all underwriting conditions are met, and then wire funds after receiving the note.

A table-funding program started in mid- 1989 at Comerica. "A lot of lenders did not have the size to do business directly with Fannie or Freddie," Townson explains. "Yet they are reliable and experienced." Table funding "is definitely a selling point" to these correspondents, because it eliminates the need for a warehouse credit line.

Comerica doesn't "have the staff nor the interest in preparing closing documents," Townson adds. Getting documents to out-of-state correspondents on a timely basis could become difficult, she notes. However, "the correspondent is in touch with the buyer and wants to do the closing documents," she says." For him [or her], it is a customer service issue." Funds are transferred to the title insurer, who must be approved by the agencies. A letter also is requested from the insurer stating that the funds will be dispersed according to the letter of instructions.

Table-funded loans are underwritten by Comerica after processing by the correspondent. Underwriting every file helps Comerica to "feel comfortable with the integrity of the loan," according to Townson. She notes that "obviously there is a risk" that a correspondent will go out of business before sending final documents. To lessen the chance of that happening, Comerica requires originators to have an audited net worth of at least $100,000, that must "be tangible and in the company," Townson states.

Comerica will continue table funding after January 1, although modifications in their program are possible at that time. Townson expects that "pricing will get worse for the smaller guy," because servicing-released premiums will tend to either disappear or be built into the pricing in order to avoid disclosing premiums. Townson sees this as a necessity "because a homebuyer not savvy enough to understand servicing-released premiums will view pricing from a mortgage broker as being not as good as you can get from a mortgage banker," because it will appear that the broker is receiving more.

Currently, Comerica capitalizes its servicing-released premiums. But Townson notes that most loans are offered to brokers at par, so that there are small rebates and relatively little to capitalize. Rather than being aggressive on price, Comerica relies on timely and consistent underwriting and "making sure we have a fit" when adding to its base of 60 correspondents, she adds.

More flow volume?

Although the table-funding program at Atlanta's Gulf States Mortgage Co., Inc. began just in January 1992, it now accounts for 40 percent to 60 percent of the firm's wholesale business. Gulf States also offers to close mortgages in its own name, and will purchase whole loans from lenders with a net worth of at least $1 million and agency approval.

Minimum originator net worths and production levels are set for each market in order to be eligible for table funding by Gulf States, says Thom Collins, vice president of secondary marketing. Having variable targets is due to the fact that "an originator in Washington, D.C. can deliver more than one in Sarasota," he explains. All wholesale loans are underwritten by Gulf States, and "we prefer to prepare the closing package," says Collins. But he adds that a few mortgage brokers have other arrangements.

One problem that the firm finds when table funding relates to the receipt of final documents after the dosing. "The note must be endorsed to Gulf States, and the deed must be assigned to us," adds Collins. "This requires the broker's signature, but he often doesn't attend the closing, and the assignment is delayed." For that reason, a loan might not get into the desired pool as originally planned.

Flow business and whole loan purchases could increase due to the mortgage broker disclosure requirements that begin January 1, says Collins. "Are commercial banks going to make credit lines more available to mortgage brokers? If they don't, brokers will close and then sell loans quickly," Collins speculates.

Disclosure won't

hurt

After starting in the Southeast in 1990, Charlotte, North Carolina's BarclaysAmerican/Mortgage Corp. has spread its table-funding operation from Virginia to New Jersey, and into Illinois, Texas and Colorado, says Senior Vice President and Director of Wholesale Lending Scott Jones.

"We provide them [with] a mechanism to get rates daily," explains Jones, "and have a lock-in line to register loans." Every file is underwritten by BarclaysAmerican, which also prepares closing packages from hub offices in Charlotte and Houston.

"Brokers would prefer to do documents themselves" he notes," and it is a nuance we will try with our bigger and better customers." To qualify, originators must have production volume of $1 million monthly, as well as closing experience. Although the title agent would get the package from the broker, he or she still would be told to contact BarclaysAmerican before funding.

Jones sees the EITF's accounting ruling as creating more competition. "It will free up other firms to focus on table funding," he explains. BarclaysAmerican's percentage of wholesale table funding transactions where the broker closes in his or her own name has gone from less than half, to all loans, since the EITF ruling. The ruling "requires closing in the broker's name" in order to make the capitalization of servicing-released premiums possible.

Broker fee disclosure "will eventually be a relatively moot point," says Jones. He thinks that in the future, all lenders could be required to fully disclose, including mortgage banking retail operations. Jones also notes that disclosure already is the law in California and Florida, and it hasn't hurt mortgage broker market share in those markets.

BarclaysAmerican doesn't offer rebates or volume bonuses. But knowing they will get a servicing-released premium provides mortgage brokers with "more flexibility to subsidize price," he adds. For instance, a broker can reduce the points charged when he or she knows a servicing-released premium is coming.

Table funding expansion

Despite the inherent risks in table funding, Corinthian Mortgage Corp. in Overland Park, Kansas has been doing it for five years without a problem, says Senior Vice President Bourland. "We sign up brokers we have confidence in," he explains.

Three-quarters of the firm's wholesale business is table funded, he adds. Corinthian expanded its table funding "in circles from Kansas and Missouri," according to Bourland. Total originations for Corinthian will be $1.5 billion in 1992 - and 85 percent of that is wholesale production.

Corinthian underwrites each loan after the mortgage broker locks in a price and processes the mortgage. A servicing-released premium of between 50 and 125 basis points is paid after all the documents are delivered, Bourland adds. He says that price depends "on the type of production."

Servicing-released premiums vary widely among lenders. For instance, a wholesale firm that grants large premiums might make up for that by charging higher discount points.

Closing expertise

"Specific guidelines" are given by Sears Mortgage Corp. in Vernon Hills, Illinois regarding the "net worth and abilities" expected before table funding is offered, says a company spokesperson. One of the abilities expected is document preparation, adds Mark Ulmer, senior vice president of national wholesale and correspondent lending. Sears Mortgage reviews loan files prior to closing, he adds. Ulmer also notes that contracts containing certain representations and warranties are signed by all Sears correspondents.

Closing in the local originator's name is helpful to those originators, he adds. "Brokers like to preserve their company's identity throughout the transaction," Ulmer says. "The customer sees them as the company doing the lending." In addition, in many communities, there are firms that track the largest lenders from deed recordings in the county courthouse. A loan that closes in a wholesale company's name thus isn't counted as part of a broker's business. But table-funded loans do show up in these counts, and can help a broker gain a reputation as a major local lender.

Growing volume

EITF's recent announcement concerning the capitalization of servicing-released premiums has encouraged BancBoston Mortgage Corp. in Jacksonville, Florida to begin offering mortgage brokers' premiums instead of just subsidized pricing, says Executive Vice President Mark Johnson. "It's a very fine line," he adds. "The more servicing-released premiums paid to brokers, the less attractive that business is [to wholesaler lenders]."

Johnson notes that buying closed loans from correspondents is another alternative, but one that is more expensive than doing table funding with mortgage brokers. "We're very pleased with the quality of loans" from brokers, he says.

BancBoston Mortgage already is providing full disclosures on its wholesale loans, even though Johnson says the broker fee disclosure requirements will be harmful to mortgage brokers. Still, he expects table funding to continue growing. Currently it makes up 15 percent of BancBoston's total retail and wholesale volume, and is increasing. Table funding began on the West coast for BancBoston Mortgage and then spread to the Atlantic coast. Johnson says the firm's next table-funding office will open in the Midwest or Southwest.

Quality control expenses are high on wholesale loans, according to the wholesalers surveyed. Employment and credit are reverified by BancBoston Mortgage, and at times, another appraisal is ordered. But Johnson says these expenses "are substantially offset by the lack of fixed costs" when mortgage brokers are used for originations. "They are the lowest-cost providers" of home loans, he adds.

BancBoston Mortgage prepares the closing package through a document preparation service, and issues closing instructions. Loans are sent to BancBoston for review prior to funding. Although a few brokers would prefer to manage their own closings in order to be able to cater to customers' schedules, their complaints about service are not overwhelming, says Johnson. BancBoston is able "to get docs out rapidly."

Fraud worries

Table funding accounted for the majority of last year's production at America's Lending Network, Inc. (ALN) in Fairfax, Virginia, says President Alexander Schultes. ALN is the mortgage banking unit of Standard Federal Savings Bank, which was placed under RTC conservatorship in October.

Yet, because ALN is a separately capitalized entity, business is proceeding there as usual, according to Schultes. Capitalized servicing premiums have not caused problems for ALN, he notes. However, during times of high prepayments, loans potentially could leave the servicing portfolio before the premiums used to acquire them have amortized, thus exposing the servicer to losses.

Due to concerns about fraud, table-funded loans always close in ALN's name rather than the originator's, Schultes says. However, he plans on further reducing opportunities for fraud by tying correspondents into the automation system used by ALN's retail origination arm, America's Lending Center. Schultes then envisions offering to fund in the name of correspondent firms. He adds that ALN has been fully disclosing all correspondent compensation, as now required under the RESPA rule, since late in the summer.

Two types of

closings

Although it will originate over $2 billion this year, just $100 million of Chase Home Mortgage Corporation table-funded business will be funded in the broker's name, says Senior Vice President Tom Glenn. He explains that over 85 percent of Chase's wholesale business comes from jumbo loans, and that brokers have less need to close jumbo loans in their name.

"On conforming loans, they want to be known as the lender," Glenn says. "But on higher loans sizes it is generally recognized that you need a special investor." Therefore, brokers are not hesitant to close those loans in the investor's name. Glenn believes two types of correspondent relationships could evolve, depending upon whether the broker or the wholesale controls the closing.

"While we do not currently specify a minimum net worth, we do control the closing process and look to the agreement to protect us in the event of fraud and/or early payment default. If the broker were to control the closing, it would make sense to have criteria similar to our flow wholesale program, which requires a minimum net worth and stronger reps and warranties," says Glenn.

Under the broker controlled closing process in which the loan closes in the broker's name, closing instructions, plus the endorsed note and assignment would be faxed to the wholesaler before any funds would be disbursed. By controlling the closing, the brokers would benefit in two ways; they could provide better service to their customers and could have an opportunity to earn and collect document preparation fees.

The additional risks associated with a large table-fund program are credit and financial-related. Closing instructions issued by the broker to the closing agent, which are incorrect or that have partially omitted the terms of loan approval granted by the lender, are of concern. Additionally, there is always the risk that a loan will be closed without a proper endorsement or assignment. Although the documents will eventually be corrected, a marketing loss due to a missed shipment could occur.

Starting small

Expansion of Norwest Funding, Inc.'s table-funding program has itself been tabled until the regulatory and accounting issues have been cleared up. "We'd like to see how it shakes out, so that when we expand, we make sure we do it correctly," says Vice President James R. Loving.

Differing rules and enforcement policies being used by various regulatory bodies not only cause confusion, but "may turn into additional costs that will be passed on to the consumer," says Loving. He thinks lenders "will become more conservative" due to the uncertainty.

Currently, Norwest offers table funding just to a handful of firms near the firm's home office in Minneapolis-St. Paul. "It provides for better control to work with lenders that we know," says Loving, who explains that "you're dealing with a small lender with a very minimal net worth." Roughly $500 million in production will be table funded by Norwest this year.

"You like to say you have repurchase contracts," he adds, but Loving isn't sure how realistic that is when dealing with thinly capitalized firms. In contrast, the net worth requirement imposed on Norwest correspondents is $500,000. But he notes that in several years of providing table funding, no loans have been repurchased.

Only "brokers with the strongest reputations" are considered for table funding, notes Loving, who adds that a broker's commitment to weathering both good and bad times is important. When negotiating agreements with brokers, Norwest bases its price on both loan quality and the percentage of business that a broker will produce.

Too many problems

Just four correspondents have delegated underwriting authority and draw their own documents before Plaza Funding in Santa Ana, California wires funds to the table, says Executive Vice President Phyllis Downes. Generally, Plaza underwrites its wholesale loans and then prepares documents in its own name.

Downes says that problems in getting follow-up documents needed to complete the file - such as the closing HUD-1 statement and recorded deed-of-trust - have discouraged Plaza from funding in a broker's name. "Most loan brokers have no capacity to buy back their loans," she adds. Even so, avoiding table funding and aggressive accounting techniques hasn't stemmed Plaza's recent growth pace, which has been one of the strongest in the business.

In January, Plaza will disclose broker compensation paid to brokers unless it is purchasing a closed loan, says Downes. These disclosure requirements could cause problems for table-funders, she notes.

Many lenders started table funding under the impression that those deals weren't subject to RESPA disclosure guidelines. Now that they are, it will be up to the market to find a new response to today's situation.
COPYRIGHT 1992 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Schneider, Howard
Publication:Mortgage Banking
Article Type:Cover Story
Date:Dec 1, 1992
Words:3629
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