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Who's whose customer?


Having been in the mortgage lending business nearly nine years now, spending most of that time in the Rocky Mountain and western regions, my personal work experience reflects the many changes that have taken place in the industry in recent times. I worked for a savings and loan in its boom years, I endured the experience of a company sale, I've been involved in a an FSLIC take-over as well as a Resolution Trust Corporation executorship. I have experienced the massive growth of the mortgage brokerage business and even had the pleasure of starting and operating my own mortgage wholesale company.

During this time, I have witnessed the economic boom times in the oil belt states, the housing market boom of the western and eastern coastal states, as well as the latter bust of the oil belt economy. As a result of these boom and bust markets, the secondary markets have become more particular about what they will buy. They have required stringent and extensive quality control programs to function as watch dogs over the quality of the products they buy.

The advent of correspondent lenders selling mortgage loans has fostered an even larger secondary market for mortgages. One problem that grew along with this change in the business is that due to competition, sellers of loans have been allowed to believe that they, in effect, are exempt from having to worry about the ongoing performance of the mortgages they sell.

For argument's sake, we can agree on the fact that the purchaser is offering to the correspondent their mortgage programs and services. But, is it not the correspondent who is selling the wholesaler the ultimate end-product--the actual mortgage?

It's helpful to look at the consumer goods retail business to put this in perspective. Those companies that have earned distinction happen to be companies that stand behind their products and service. For example, L.L. Bean, a sporting goods catalogue store based in Freeport, Maine, guarantees all their products for life. If it breaks or doesn't meet your expectations, you send it back and they will fix it or replace it. Imagine yourself as a consumer buying a product and within the first month the product broke or didn't perform as you were told it would. Would you ever return to that store? Probably not. But isn't that essentially what happens when a correspondent sells a loan to a wholesaler and the loan doesn't pay as expected, or sometimes doesn't pay at all?

Mortgage banking has become a business now where people are saying, "You bought it and if it doesn't work correctly, or perform at all, too bad; it's no longer my responsibility."

In the wholesale business, I think we need to start standing behind the product we are selling. If we don't have a way of delivering, fixing or repurchasing the merchandise we sell--mortgages--then perhaps the industry needs to find other ways to correct unmarketable and non-performing loans.

Fannie Mae and Freddie Mac raised their net worth requirements in response to the purchase of poor performing loans. The Department of Housing and Urban Development is considering raising its net worth requirements from $25,000 for a "Mini Eagle" to $50,000 and possibly $100,000, coupled with raising the "full Eagle" to $500,000. While this represents one solution for some purchasers of loans, it greatly reduces the number of companies that can originate loans. Where this "solution" falls short, however, is that those companies with substantial net worth, while they have the deep pockets to buy back poor-performing loans, also have the financial wherewithal to avoid having to buy back deficient loans. I believe that simply requiring companies to meet higher net worth standards amounts to attacking a symptom of the problem but not the problem itself. The real problem is that poor quality loans are being produced and sold with little or no regard for how they perform.

In California, mortgage bankers and appraisers are regulated by a real estate commission. Other states require that mortgage originators maintain fidelity bond coverage and errors and omissions insurance. While this may appear a logical solution to the problem of fraudulent loans, it does nothing to solve the problem of a good loan that just isn't performing. Furthermore, such an approach requires legislation.

So in the interim, sellers of loans need to devise a solution to avoid the worst case outcome of allowing this problem to linger--being put out of business. One such solution might be having sellers of loans agree to pay all deficiencies arising from a loan that is unmarketable or one that is being foreclosed upon. Obviously, this is not a solution that the majority of sellers would find appealing. However, it would greatly reduce the need for the agencies and other buyers to require a higher net worth.

I believe that the first step sellers must take to win back customers is return to the basics and act as though it was their money being lent to borrowers. When I began as a loan officer, I had to conduct an in-person loan interview with the borrower to ensure the interests of my financial institution were protected.

Today, loan officers are basically required to make sure they complete all the blanks on the loan application. Then, if all the numbers work, they give the people a loan.

Furthermore, in today's market, if a loan officer is terminated for fraud, he or she can walk down the street and go to work for another lender tomorrow. Two years ago, I terminated a loan officer because of the number of poor quality loans he originated--41 percent went into foreclosure. This loan officer was out of business for less than a week. We must do a better job of monitoring the people we employ and of balancing quality versus production volume. Wholesalers need to track delinquencies and foreclosures for each individual correspondent and provide correspondents with these figures regularly so they can manage the quality of business they are producing. Sellers of loans can't manipulate Time Saver or other low-documentation loans and submit them when they know they're not representing the true picture. Sellers can't expect wholesalers to continue offering programs, such as no-cost refinances, if the loan is going to be rewritten every six months. Sellers need to perform aggressive, prior-to-closing quality control checks on the merchandise they sell. Furthermore, they need to know who they are doing business with.

When a correspondent sends in a loan for approval, that should amount to a recommendation to approve the loan for purchase, instead of a "see if we can sneak this one through this investor" deal. One of my correspondents sends out a verification of mortgage on every one of the deals she closes to ensure that her "customer" is making their payments on time. If the payment is not current, she will personally go to the borrower and collect the payment for our company. If all correspondents would take this much interest in each and every loan, I guarantee the problem would be solved.

The mortgage industry overall has become very myopic in the wake of changes that are fundamentally transforming the business. In the process, we have not taken the time to think about how decisions we make today will affect us in the future. Having had the opportunity to deal with the business on more of a regional level during my career, it's interesting to watch decisions by investors to either buy or forego buying loans in different states, and to try to understand why these decisions are being made. Investors' decisions to invest in a state or to avoid buying loans in certain areas are based mostly on subjective information and outdated delinquency and foreclosure records. Accordingly, many states don't have access to the best priced or easiest to work with loan products because wholesalers will not make them available due to perceived risk in that market. Do you think this would remain a problem if sellers of loans were to tell a wholesaler that if the product they purchased broke or didn't perform for any reason, they would repair it or return their money?

A recent issue of a publication devoted to wholesaling surveyed 47 percent of mortgage purchasers and found that they did not want to buy loans originated in oil belt states.

This takes us back to our original analogy in the retail consumer goods market. Perhaps there is a lesson our industry can learn here. If you purchased a pair of waterproof boots from L.L. Bean and they leaked and L.L. Bean wouldn't fix or replace them, would you ever buy more merchandise from them? Perhaps this is why L.L. Bean has been in business for more than 78 years and doesn't lack customers wanting to purchase their products. They stand behind their products. Product guarantees may be an idea with some merit for the wholesale mortgage business.
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Title Annotation:correspondent banks should stand behind their products
Publication:Mortgage Banking
Article Type:column
Date:Aug 1, 1990
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