Lenders discuss risks of correspondent transitions at Subprime Summit
By NEIL J. MORSE
3/10/2005

Brokers' profit margins are thinner than a razor's edge. Nevertheless, the number of brokers continues to proliferate, driven in part by the allure of conversion to correspondent lending status.

"They're multiplying like rabbits," says Frank Curry, president, Acoustic Home Loans, Orange, Calif. "We're approving 200 or 300 new brokers every week," the growth stemming largely from the low barrier to entry, he says.

Many brokers see greener grass on the banking side of mortgage originations, where the average revenue from a loan is about $2,500, compared with $450 for a brokered transaction.

"The correspondent business is a freight train, we can't stop it," ominously remarks Dan Rawitch, executive vice president, WMC Mortgage, Woodland Hills, Calif. Rawitch, along with the other executives, made their comments at a panel session held at the recent Subprime Summit in Arizona.

What's troubling, he says, is that "the $2 million to $3 million brokers who don't know anything about being correspondents are getting warehouse lines to get around RESPA."

But "they don't understand the process," Rawitch charges, adding: "I'm concerned about the quality of loans [they're originating]. It's scary that almost every broker is getting a line now," the WMC executive says.

That rings true for Novastar Mortgage, Kansas City, Mo. where David Pazgan, executive vice president, says "anyone who is out there originating a couple of million [dollars in loans] a month, we offer warehouse lines."

But the bloom comes off the rose pretty quickly, according to Pazgan, when brokers drill down into the additional risk involved in banking.

"Once they find out what's involved, with HMDA reporting, 1098 reporting and all the legal things you have to do as a banker, that you don't have to deal with as a broker, they kind of have second thoughts."

That slows the conversion rate, says Pazgan. Ultimately "the number successfully [making the change] is relatively low right now for Novastar."

Yet tight profit margins will continue to put pressure on brokers, and others, to generate revenue.

WMC's Rawitch says "[tight] margins are the biggest threat right now. We're all running full speed towards the wall and no one wants veer away."

He asks: "How thin can the margins get before the industry puts some logic back into pricing? Our costs have gone up 200 basis points and our coupon is unchanged."

On the bright side, Frank Curry of Acoustic Home Loans, sees market strength for brokers coming from continued immigration into the United States.

With immigration, brokers "will continue to play an important role in the real estate transaction because they relate to borrowers better. They'll continue to be a strong source of business," says Curry.

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