What is a correspondent lender?
A correspondent lender is a type of lending institution that has a secured tradeline from an investor- usually a direct lender - in which they funds loan from. Correspondent lenders differ from brokers because they employ their own underwriting staff, and funding coordinators, while brokers utilize the staff of the lender.
Correspondents look to achieve volume. They fund as many loans as they can, with the goal of filling their tradeline. Bonuses and incentives are passed along when this is accompished (this is profit not consumer savings). At the end of the month, the closed loans are packaged, and delivered to the investor. The investor will review random cases out of the packaged files as a form of compliance, which usually pass, and operations continue. Brokers take advantage of correspondents because their timeframes are typically faster, despite the cost of rates usually coming at a slight premium in comparison the the direct lender that they have their tradeline from. Like banks correspondents are not required to disclose yield spread made (YSP) made on an interest rate.
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.
An example would be as follows: Joe Borrower completes a mortgage application with a correspondent lender, that lender approves the loan for $200,000. At closing, the lender wires $200,000 from their line of credit to the escrow or title company, and Joe Borrower buys the house. The lender will now take the completed signed mortgage loan, and sell it to a bank or investor, for $200,000 (or more if it is profitable); they will then take that $200,000 and pay down the line of credit.
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.
There are 3 basic types of originators that you will run into:
A Direct Lender
A Correspondent Lender
Each of these originators has their own benefits and drawbacks.
A direct lender should know their products inside and out. The direct lender underwrites its own loans and provides the funds at closing. They also may offer loans that they will be servicing, thus they don't have to conform to the standards for loans being sold on the secondary market. The biggest drawback is that they are limited to the products and efficiency of only their company.
A broker has access to several different lenders and thus may offer a vast array of products. They are able to pick the lender with the best turn times, best rates, and may place the customer with the lender that offers the best fit. A broker relies on the lender to underwrite and fund the loan. The drawback comes into play with inexperience. With access to so many products, sometimes an overlooked detail can cause a loan to be rejected by a lender.
A correspondent lender has access to several "investors", that are normally the same lenders that a broker could have access to. The correspondent lender underwrites the loans to the standards of the investor and provides the funds at close. The same drawbacks a broker has apply to a correspondent lender.