TheMReport — News and strategies for the evolving mortgage marketplace.
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Cover story By Bob Calandra I t appears that Wells Fargo may be the last bank standing when it comes to originating residential mortgages. The other large banks that dominated the residential mortgage segment for countless years have withdrawn from America's neighborhoods and suburbs, ceding the ground and the mortgages for the houses built on it. The banks' exodus has created a tremendous void for residential mortgages. But that space is quickly being filled by an emerging and rapidly growing group of non-banking lenders. Companies like Supreme Lending and Carrington Mortgage Services are not only coming into the segment with abundant capital, but also are delivering mortgages and winning over grateful consumers. "Many of the non-bank lenders aren't battling the repurchase hangover that came out of the 2005 to 2008 period, so they have less legacy hangover to be a black cloud for them," says Robert Bostrom, a former general counsel to Freddie Mac and now in corporate, securities, and financial institution practices with Greenberg Traurig LLP in New York. "So they can just start with a little clearer slate and look forward as opposed to continuing to deal with the legacy hangover." Many believe the number of residential mortgages written by the new companies will only increase during the next few years. Others aren't so sure. They point to the Consumer Financial Protection Bureau (CFPB), which last month outlined new regulations that defined the types of loans that can be offered, who can receive those loans, and loan terms. But more important, the CFPB will also be conducting strict bank-like audits, which non-bank lenders have never experienced. Bostrom and others in the industry believe the combination of regulations and audits will make it significantly difficult and challenging for some non-bank lenders and increase the cost of doing business. Towing the regulation line and avoiding costly non-compliance sanctions will require non-bank lenders to hire attorneys and internal and external auditors, placing a financial burden on smaller nonbank lenders. "As we move forward, the level of regulatory burden in terms of compliance with both servicing standards as well as disclosure standards are going to drive many of the smaller players out of business," Bostrom says. "And so it's really going to result, I think, in a consolidation in that space into the bigger players." Nor does having the non-bank lenders occupying the residential space necessarily mean residential mortgages will be easier to come by. After all, Bostrom says, 70 percent of all loans written are purchased by Freddie Mac or Fannie Mae. In the third quarter of 2012, both agencies were requiring FICO scores in the mid-700s, a decidedly high number. It stands to reason that originators who want to resell loans will only write mortgages Freddie and Fannie will accept. "Risk-adjusted pricing is going to have an impact on [mortgage] availability," Bostrom says. "So not only will it determine whether or not you get a mortgage, but it also will determine, in some degree, the pricing of the mortgage. The rate will vary depending on an individual's credit rating." Here, then, is a look at how two non-bank lenders view the trends, borrowers, and new regulations in the residential mortgage market. Picking Up Speed F ounded in 1999 as a brokerage, the Dallas-based company converted to a mortgage banker in 2004. Today the company has 70 branches in 30 states doing $3 billion in business last year. It's far more than Scott Everett, Supreme's president, ever expected when he started the business In fact, Everett's credo back then was a pretty laid-back and homey "do mortgages, sell mortgages, and go home." Today Supreme is all about speed. "I think the big change is that 95 percent of our loans are done with e-signatures and 100 percent are delivered to our investors electronically," says Everett, adding the company's business is split evenly between refinancing and new mortgages. "Two years ago, I would have never said that." Speed may kill when talking about cars and motorcycles. But when it comes to the residential mortgage business, speed saves— money. Filling out applications electronically can reduce closing a loan from the traditional two to three months to three weeks. And that can save a borrower a half of a percentage point on his or her rate. "If I can close in 21 days, which is our average time, I can give you the ultimate rate," he says. "The efficiencies and the executed end product that you give to customers are insanely more profitable. Therefore it equates to lower rates." The information is sent to the borrower in a secure, encrypted file format. Clients wary of transferring sensitive private information across the Internet can print the file, sign it, and send it back in overnight mail. Everett finds that borrowers are more open to working with non-bank lenders, especially if the interest rate is right. After all, there really isn't a difference between working with Supreme or Quicken, a non-bank mortgage The M Report | 23