First-time homebuyers may feel overwhelmed by the number of possibilities.
You must decide:
- on a house
- how much you can afford
- the best loan choice
- who to work with
There are many different types of lenders available – online lenders, mortgage bankers, mortgage brokers, conventional banks, and credit unions. Correspondent lending is another loan option you can explore for a mortgage.
In this blog post, we’ll delve into the world of correspondent lending, exploring its fundamentals, processes, benefits, and whether it’s the best option for you.
What is correspondent lending?
In correspondent lending, a lender makes and closes mortgage loans in their own name before selling them to sponsors or aggregators, which are bigger financial institutions or investors.
These organizations purchase loans in accordance with a set of rules and regulations, typically provided to them by government-backed businesses like Fannie Mae or Freddie Mac.
The correspondent lending process
- Origination: Correspondent lenders originate loans, following specific guidelines and criteria provided by the purchasing entity.
- Underwriting and approval: The loans undergo thorough underwriting processes to ensure they meet the standards set by the purchasing entity.
- Funding and closing: Once approved, loans are funded and closed in the name of the correspondent lender.
- Sale of loans: The lender sells the closed loans to the purchasing entity, receiving funds to originate new mortgages.
What does a correspondent lender do?
Loan origination
Correspondent lenders engage in the process of originating mortgage loans. This means talking to borrowers, getting the paperwork they need, approving the loans, and making sure they follow all banking rules.
Funding
Mortgage loans that correspondent lenders set up are paid for with their own money or credit lines. In turn, this lets them lend money to people who need it.
Loan sale
Correspondent lenders don’t keep the loans for a long time. Instead, they sell them to bigger banks or buyers in the secondary mortgage market. Most of the time, this deal is finished soon after the loans are closed.
Servicing transfer
Once the loans have been sold, the correspondent lender gives the new owner the right to service the loans. Loan servicing includes getting regular payments, keeping an eye on escrow accounts, helping customers, and making sure that the loan terms are followed.
The company that bought the loans typically takes care of this.
Risk mitigation
By selling loans to bigger institutions, correspondent lenders can lower the risks that come with changes in interest rates, the economy, and other things that could affect how well the loans are paid back.
In essence, correspondent lenders play a role in the initial stages of the mortgage process, originating and funding loans, but they do not retain long-term ownership or servicing responsibilities for the loans.
Examples of correspondent lenders
Example 1: Wells Fargo
Wells Fargo operates a correspondent lending division, which works with credit unions, housing brokers, and smaller banks. These correspondents make loans, and Wells Fargo, as the buying investor, helps with underwriting and funds.
Example 2: Quicken Loans
Quicken Loans has a correspondent lending channel that allows smaller lenders to originate loans using their own brand while leveraging Quicken Loans for underwriting and closing services. This enables regional lenders to offer a wider range of mortgage products.
Example 3: Caliber Home Loans
Caliber Home Loans has a correspondent lending division that partners with community banks, credit unions, and mortgage brokers. Correspondents can use Caliber’s platform to access a variety of loan products, technology tools, and underwriting support while maintaining their own customer relationships.
What is the difference between a correspondent lender and a direct lender?
A correspondent lender and a direct lender are terms commonly used in the mortgage industry to describe different types of lending institutions.
Here are the key differences between a correspondent lender and a direct lender:
Direct lender:
- a financial institution or mortgage bank that originates, processes, underwrites, and funds mortgage loans directly to borrowers.
- uses their own funds or credit lines to finance the loans they originate.
- may service the loans themselves or transfer the servicing to another entity after closing.
Correspondent lender:
- typically a smaller financial institution, such as a community bank or credit union, that originates and funds mortgage loans using its own funds.
- often sell the loans to larger financial institutions, such as wholesale lenders or investors, instead of servicing the loans themselves.
- may communicate with the borrower and manage the loan origination process, but another organization handles the long-term servicing.
In summary, the major difference is how the loans are paid back (i.e., serviced). Direct lenders usually make the loans and make sure they are paid back. Correspondent lenders, on the other hand, may sell the loans to other institutions to be paid back, so they only work on the loan application process.
Who can use a correspondent lender?
Everyone is able to use a correspondent loan.
As a result of correspondent lenders working with a wide range of mortgage buyers, loans are available for a wide range of home shopping situations.
This includes buying business properties, single-family homes, condos, and properties with more than one unit. Because of this, correspondent lenders are good option for a lot of people.
Impact of correspondent lenders on the mortgage market
For Borrowers: Correspondent lending can lead to increased access to mortgage funds, competitive interest rates, and a wider range of loan products, fostering more choices for borrowers.
For Lenders: It offers a way for smaller lenders to compete in the mortgage market, give different types of loans, and make money without having to hold on to long-term loans.
Advantages of correspondent lending
Access to funds: Correspondent lending provides smaller lenders with access to liquidity by allowing them to sell loans in the secondary market, enabling them to lend more to borrowers.
Risk mitigation: By selling loans to aggregators, correspondent lenders mitigate risks associated with interest rate fluctuations, defaults, and liquidity.
Customization: Correspondent lenders can work with specific loan products, guidelines, and criteria set by investors, tailoring their offerings to niche markets or specific borrower needs.
Market expansion: It allows lenders to expand their market presence without significantly increasing their risk exposure or capital requirements.
Disadvantages of correspondent lending
Extra fees: Some lenders charge extra fees. Make sure you understand what you’re paying for and how much it is.
Strict adherence to policies: Because correspondent lenders sell to big mortgage buyers, those investors have rules that must be followed. The investor agency has rules that say a loan can’t be made if they aren’t met.
Final thoughts
Correspondent lending acts as a bridge between smaller lenders and larger financial institutions, facilitating the flow of mortgage funds while offering benefits to both lenders and borrowers.
Correspondent lending continues to be essential to maintaining a flexible mortgage market as the mortgage industry adjusts to shifting demands. Understanding its importance is essential to grasping the complex mechanisms within the mortgage sector.