Eliminate Investor Credit Overlays by Selling Directly to the GSEs

I’ve been on the road for the past three weeks, mostly performing reviews of mortgage bankers for warehouse lenders.  I am happy to report that all channels of origination are doing well. 

I’m no longer hearing the grumblings we heard earlier in the year as record low rates have sparked a mini-refi boom throughout the country and in certain areas the purchase market is also doing well thanks to record high levels of home affordability.  If one is gainfully employed and has excellent credit, it is a great time to buy a home. Referral based retail and internet retail shops are generating impressive profits.  Contrary to the naysayers, the broker business is thriving and wholesale lenders are quite busy. Everyone appears to have adjusted to the new RESPA regulations and companies are settling into the new FNMA Loan Quality Control Initiative (LQI).

There is one exception though: pre-purchase review times at the major loan aggregators

Two of the questions we ask mortgage bankers during our FOCIS review is: What is the average number of days loans sit on your warehouse line, from loan funding to loan purchase?  How many loans have been on your line for more than 30 days?

Usually longer warehouse turn times denote a “train wreck” in mortgage operations. Other times it's a data integrity issue. But recently we've found this problem is not a direct result of inefficiencies on the mortgage banker's side....

Most of the mortgage bankers I’ve reviewed have excellent controls, processes, employees and systems to originate and close high quality loans.  Most have implemented extensive pre-funding quality control procedures to ensure all loans meet investor guidelines. Regardless, they are being tortured by the large aggregators.  Many of our clients feel like the large aggregators are being managed by the risk management departments.  There may be some truth in this because most large aggregators are owned by banks. Banks are risk averse and continue to add credit overlays on GSE and FHA products to reduce the possibility they will have to deal with delinquencies.

For  well run and well capitalized mortgage banks, there is an alternative.  The alternative is to become a GSE seller/ servicer so you can sell directly to Fannie and Freddie.  As GNMA opens up, obtain your approval through them as well for your FHA product.  This alternative will eliminate credit overlays and reduce warehouse dwell times.