Travels this week took Corky to New York and Cameron to Mississippi and the birthplace of Elvis Presley. Right in the middle of a rural residential neighborhood is a huge Elvis birthplace landmark. The museum tenant told us during the summer months, the landmark is visited by thousands of Elvis enthusiasts daily. We’re not huge Elvis fans, but thought it was worth stopping by. Here’s a photo of the main attraction.
Today’s topic centers on investor counterparty risk. Being prepared is paramount for a soldier going into battle. A weapon, proper clothing, food rations, communication device, and having enough ammunition to engage the enemy is essential. A trained soldier would never go into battle unless all the champers of his/her weapon are fully loaded with bullets.
So it is with mortgage bankers. We may not be engaging an enemy, but having an arsenal of weapons that are fully loaded is imperative to compete in the marketplace. Specifically, having a magazine full of various secondary market investors will help ensure business continuity and mitigate investor counterparty risk.
Since the mortgage meltdown, the landscape of secondary market investors has changed rapidly. Many mortgage bankers sold to investors that many thought would always be in the market to purchase loans. Many of the investors are not here today or have dramatically curtailed their purchase activities. A new group of investors have emerged to exploit the turmoil, offering product variations the large investor conduits are not purchasing.
What should a mortgage banker do today to ensure their secondary market magazine is fully loaded?
- Capital: Earn or raise enough capital to meet FHA and Agency net worth requirements. If you don’t have the $2.5M net worth requirement, you might find yourself dependent on a captive warehouse line and single source for loan sales in the not so distant future. Being dependent on one source for warehousing and loan sales is the quickest way to end your tenure as a mortgage banker.
- FHA Approval: If you want to be a mortgage banker, you must have your HUD Eagle approval.
- Agency Approval: Obtaining FNMA and FHLMC approval provides many benefits. First, you can sell loans directly to their cash window and quickly get loans purchased without the forensic loan level review required by other secondary market investors. Secondly, the Agencies don’t have the extensive loan level adjustors often required by other secondary market investors. Thirdly, if you get a LP/DU cert, the loan is eligible for purchase; the GSEs don’t have credit overlays as seen with many secondary market investors. The GSE approval process can be daunting, but a good advisor can help prepare and compile the necessary documentation required.
- Key Investor Aggregators: There are some very good large secondary market aggregators that appear to be committed to purchase closed loans from mortgage bankers. Identify the players and seek approval from them.
- Small Regional Investors: There are a growing number of small mortgage bankers that have emerge since the mortgage meltdown that are actively buying closed FHA insured and GSE eligible loans. Many have programs and credit overlays that are very competitive compared to the major aggregator investors.
- GNMA Approval: Yes it’s hard and takes time, but having the ability to issuer your own GNMA security can be very important if the investor community shrinks further.
Investor counterparty risk management is a critical question during our Mortgage Banker Risk Assessment (MBRA) reviews. Being prepared for the unknown and unexpected is paramount in successfully managing counterparty risk. Always have a diverse group of investors for loan sales. Being prepared means having all the chambers in the gun loaded.
C. M. "Corky" Watts, CMB
Cameron Watts, CMB