Leading economic indicators are favorable for a continued improvement in both the economy as a whole and the housing industry, and many midtier lenders will find their companies operating at a disadvantage when compared to larger firms that are approved to sell their production directly to the industry's largest investors.
These smaller firms might have already evolved from a brokerage shop to a small mortgage banking enterprise and then to a correspondent lender. They would like to evolve to the next level and become even more profitable, by delivering directly to the agencies. Often before they can begin, though, they need a way to monetize their servicing rights on those loans. A co-issue relationship is a method by which they may do so.
When a lender has grown to the point that it no longer wishes to sell its volume to a larger aggregator, it can find a suitable servicing partner and begin selling directly to the agencies under a co-issue arrangement.
A co-issue transaction allows the mid-sized originator to sell its volume to one of the agencies at the same time they designate a servicing partner approved by the agency as the owner of the mortgage servicing rights. The originator gets paid by both the investor and the servicing partner.
There are technical differences to how such a transaction works for each agency, but the basic structure is consistent across Fannie Mae, Freddie Mac and Ginnie Mae.
Co-issue is a great way for smaller lenders to grow. If it's done correctly and with the right partner, it can create a smooth transition to higher profitability and pave the way for even more volume in the future. Among the benefits are a more efficient operation, flexibility in execution and, perhaps most important to many, higher prices for their production.
Historically, selling assets to the agencies results in higher prices for those assets. Firms that do not wish to retain the MSR on these loans can use co-issue transactions to increase the amount of gain on sale they receive on each loan they originate. Prices fluctuate, but lenders can expect to see prices that are higher than what their aggregators were paying them, when they add the agency price to the price they get for selling the servicing rights.
Nearly as important is the positive impact this will have on the efficiency of their operations. Instead of lending and managing to a number of requirement sets provided by different aggregators, lenders can focus their efforts on just a few, or even a single set of requirements, streamlining their post-close quality control and investor delivery functions. The right co-issue partner can make the servicing transfer easy.
Lenders who take advantage of this opportunity need not abandon selling part of their volume on a correspondent basis. There are times when it might make sense to do so. Co-issue simply provides another outlet for their business.
Forging a strong relationship with a servicer offers additional flexibility for the lender as the company grows. With access to a servicing platform through this partnership, the lender has the option to take on other lines of business, such as retaining servicing. This can be an effective strategy when spreads widen and holding onto the servicing makes sense. Flipping the switch between co-issue and retaining becomes very easy with the right co-issue partner. To make this work, your partner should own their servicing platform.
Succeeding with co-issue depends upon the quality of the partnership you develop with the mortgage loan servicing company you choose to work with.
To maximize your chances of success, seek out a servicing partner that has experience with these transactions, has a solid existing relationship with the agencies, controls its own technology and is generally a good fit for the size and style of the loan origination shop they are building. Given the fact that 2015 is expected to be a better year for housing than we have seen in many years, now is the right time to seek out such a relationship.
Craig Freel serves as senior vice president of portfolio management at RoundPoint Mortgage Servicing Corp.
