Correspondent lenders operate in the same way as brokers in avoiding market risk. The prices they deliver to borrowers are those of the wholesale lenders, plus a markup. When they lock a price for the borrower they simultaneously lock it with the wholesale lender, which locks in their markup. By my definition of "lender", therefore, correspondents don’t make it, they are just large brokers.
Are Correspondent Lenders Really Mortgage Lenders?
Correspondents do have a risk that brokers don’t, which is that the investor can force a correspondent to buy back a loan if it doesn’t meet the investor’s guidelines.
The law views the matter differently, however. Correspondents are lenders under the law, and therefore avoid having to disclose rebates. This has created a different set of disclosure rules for brokers and correspondent lenders, who are competitors, and much more alike than they are different. It has also created a wholly artificial incentive to pull brokers into larger entities, called "net branches", which are lenders and therefore don’t have to disclose rebates.
To a borrower who knows the score, it should not matter whether the LP they deal with is a broker or a correspondent lender. In either case, they should require as a condition for doing business that the LP agree in writing to a fee for service, and pass through the wholesale price to the borrower. Unfortunately, borrowers who don’t know the score assume erroneously that the law protects them.
What changes are in store for correspondent lenders?
Under legislation proposed by the Obama administration in mid-2009, all lenders would be required to retain 5% ownership of any loan they sell. If enacted, this would justify viewing correspondent lenders as "lenders".
A correspondent lender is a mortgage lending institution that typically lends money on a mortgage loan, and then sells that mortgage loan to another lender once the loan is closed. There are many variations of a correspondent lender, but the most common is a mortgage banking firm that operates off of a warehouse line. Being a mortgage banker means that the company underwrites and approves their own loans, and lends the money being borrowed. This differs from a mortgage broker, who simply arranges the financing for the borrower, and does not actually lend any money. Bankers are typically financed through a warehouse line of credit. This is essentially a very large (for several million to tens of millions of dollars) line of credit that is used to fund their lending.
A correspondent lender can vary greatly in size. It could be a company as small as 10-15 employees, with a small line of credit operating in only 1 or 2 states, or it could be a company of several thousand employees operating in all 50 states. Little changes behind the way the operation works, only the size and scale of the operation would be different. Likewise, a correspondent lender may have a relationship with 1 or 2 banks, or 30 or 40 banks, with the ability to lend according to any of their guidelines. This will also vary depending on the individual correspondent and their set up.
As a generalization, a mortgage banker or correspondent lender can be more flexible than a regular bank, as they will have access to the programs of multiple banks. Correspondent lenders are regularly graded by their investors on the quality of loans that they are selling. This is because, unlike a broker, who arranges a transaction but has no ability to approve or deny a loan, a correspondent lender is approving their own loans. This gives them more freedom, but also more risk. If the lender approves bad loans, eventually they will either lose their investor relationships or their lines of credit, or both. Due to the recent credit tightening, some smaller, lower quality, correspondent lenders have begun to have difficulty maintaining large enough lines of credit to fund their loans, as warehouse lending facilities have contracted like all other types of credit.
The final major differentiation between a correspondent lender or mortgage banker, and a servicing lender or bank, is that, while the correspondent will actually lend the money for the loan they will typically not accept monthly payments. Their job is to sell the loan to an investor before any payments are due, with the end investor or bank becoming responsible for collecting and processing payments. This is essentially what differentiates a mortgage banker and a bank that does mortgage loans. Mortgage bankers, as a general rule do not service the loans that they originate.
