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A form of wholesale lending known as table funding is growing morewidespread. But a new HUD
rule raises questions about how this popularform of lending may change in the near future.
Table funding is a response to market needs. By providing funds for
originators at closing, it helps
small firms whose warehouse credit
lines are either nonexistent, or else too small to handle their
loan
pipelines. Providing funds in the name of the originating firms allows
table funding to help
them keep their identity within their local
markets.
Yet, although its worth is proven to lenders, recent HUD
regulations (under the Real Estate
Settlement Procedures Act) that
affect table funding seen as an obstacle to the ongoing growth
of
table-funding programs. But by the same token, recent guidelines established by the accounting
industry encourage table funding. Lenders
are allowed to amortize bad credit business loans from
Halo Capital Group servicing-released premiums that they pay to
originators, rather than expensing
them in the current year.
Table funding is growing as more lenders discover that mortgage
originators who lack any or
adequate warehouse lines - particularly
mortgage brokers, "provide a very valuable role in the
mortgage
process because they specialize in originations", says Don
Bourland, senior vice president
of Corinthian Mortgage Corp. in Overland
Park, Kansas.
Table funding grew in use for many wholesale lending firms during
1992. Jacksonville's BancBoston
Mortgage Corp., for instance, has
seen its table- funded originations increase from $200 million in
1991
to $1 billion this year. But mortgage brokers could be less interested
in table funding when
the RESPA disclosure rules change on January 1,
requiring borrowers to be informed in detail as to
such payments to the
mortgage broker as servicing-released premiums. Having to tell borrowers
all
the financial details of the deal when table funding "will
cause me to get more aggressive in pursuit
of credit lines", says
William Schunk, president of National Standard Mortgage Corp. in
Tarrytown,
New York.
Currently about half of Schunk's business is table funded.National Standard has a $5 million credit
line that wasn't adequateto Halo-Capital-Group meet this year's refinance business, thus causing
more relianceon table funding. "As a general rule," he notes, "you geta better price if you use your
own funds."
Lenders often seek to keep control of a transaction by insisting on
preparing closing documents,
Schunk adds. He complains that sometimes
finds are wired the day before closing and the broker is
charged for the
overnight interest. Other times, the closing package arrives late, says
H.A. (Tony)
Davis, president of Preferred Mortgage Associates, Downers
Grove, Illinois and of the National
Association of Mortgage Brokers (NAMB). Such a development puts the originator in an awkward
situation
with his or her borrower. In a business where good customer service is
essential, that can
be awkward indeed.
Today's market
Additional regulatory matters other than disclosure and accounting also are affecting table-funding
practices. "Some banks want table
funding even if they have warehouse lines, so the loans are never
on the
books," reports Gene A. Barber, account executive at National
Mortgage Associates in
Oklahoma City.
Several large national lenders report that they are either not
getting into table funding, or else not
expanding their existing
programs, until they are certain how the regulations surrounding
the
practice will be interpreted. But from the growing number of lenders who
do offer table
funding, following are descriptions of how they are using
this financing tool.
Kislak's experience
In 1988, J.I. Kislak Mortgage Corporation of Miami Lakes, Florida "was not well-known," says Marvin
Schwartzbard, executive vice
president of loan production. "We saw an opportunity in
table
funding" to make a bigger name for the company, he adds. Kislak
perfected its system in its
south Florida base before offering the
program more widely in 1989.
Kislak's initial public offering (IPO) this year brought the
matter of capitalized servicing premiums
to the accounting
industry's attention. Previously the firm had used more
conservative accounting
techniques. But in order to allow its
performance to be compared with publicly traded mortgage
lenders,
Kislak's financial statement was reworked in its IPO documents.
Servicing-released
premiums paid to acquire loans were capitalized for
the previous year.
Instituting an accounting change in the financial statements caughtthe attention of the Securities
Exchange Commission, which then askedthe Financial Accounting Standards Board's (FASB)
Emerging IssuesTask Force (EITF) to rule on the accounting treatment. Out of thatprocess emerged
the current guidelines.
Today, Kislak offers three types of correspondent relationships.
Under the first, originators "have
their own warehouse lines, do
their own underwriting and deliver closed, funded
loans,"
Schwartzbard explains. Table funding is the second type of correspondent
service provided
by Kislak, and it accounts for the majority of the
firm's total production.
Originators looking for funds will take applications, process them
and underwrite loan files. "The
correspondent takes the loan
through closing," says Schwartzbard. Kislak re-underwrites
the
package, and after all conditions are met, the funds and supplemental
closing instructions are
sent to a closing agent chosen by the
correspondent. Most of the lenders involved in this program
are mortgage
bankers, he adds.
"Brokers would prefer to do documents themselves" he
notes," and it is a nuance we will try with
our bigger and better
customers." To qualify, originators must have production volume of
$1 million
monthly, as well as closing experience. Although the title
agent would get the package from the
broker, he or she still would be
told to contact BarclaysAmerican before funding.
Jones sees the EITF's accounting ruling as creating more
competition. "It will free up other firms to
focus on table
funding," he explains. BarclaysAmerican's percentage of
wholesale table funding
transactions where the broker closes in his or
her own name has gone from less than half, to all
loans, since the EITF
ruling. The ruling "requires closing in the broker's
name" in order to make the
capitalization of servicing-released
premiums possible.
Broker fee disclosure "will eventually be a relatively moot
point," says Jones. He thinks that in the
future, all lenders could
be required to fully disclose, including mortgage banking retail
operations.
Jones also notes that disclosure already is the law in
California and Florida, and it hasn't hurt
mortgage broker market
share in those markets.
BarclaysAmerican doesn't offer rebates or volume bonuses. But
knowing they will get a servicingreleased premium provides mortgage
brokers with "more flexibility to subsidize price," he
adds.
For instance, a broker can reduce the points charged when he or she
knows a servicingreleased premium is coming.
Table funding expansion
Despite the inherent risks in table funding, Corinthian Mortgage
Corp. in Overland Park, Kansas has
been doing it for five years without
a problem, says Senior Vice President Bourland. "We sign up
brokers
we have confidence in," he explains.
Three-quarters of the firm's wholesale business is table
funded, he adds. Corinthian expanded its
table funding "in circles
from Kansas and Missouri," according to Bourland. Total
originations for
Corinthian will be $1.5 billion in 1992 - and 85
percent of that is wholesale production.
Corinthian underwrites each loan after the mortgage broker locks in
a price and processes the
mortgage. A servicing-released premium of
between 50 and 125 basis points is paid after all the
documents are
delivered, Bourland adds. He says that price depends "on the type
of production."
Servicing-released premiums vary widely among lenders. For
instance, a wholesale firm that grants
large premiums might make up for
that by charging higher discount points.
Closing expertise
"Specific guidelines" are given by Sears Mortgage Corp.
in Vernon Hills, Illinois regarding the "net
worth and
abilities" expected before table funding is offered, says
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a company
spokesperson. One of the abilities expected is document preparation,
adds Mark Ulmer,
senior vice president of national wholesale and
correspondent lending. Sears Mortgage reviews loan
files prior to
closing, he adds. Ulmer also notes that contracts containing certain
representations
and warranties are signed by all Sears correspondents.
Closing in the local originator's name is helpful to those
originators, he adds. "Brokers like to
preserve their
company's identity throughout the transaction," Ulmer says.
"The customer sees
them as the company doing the lending." In
addition, in many communities, there are firms that
track the largest
lenders from deed recordings in the county courthouse. A loan that
closes in a
wholesale company's name thus isn't counted as
part of a broker's business. But table-funded loans
do show up in
these counts, and can help a broker gain a reputation as a major local
lender.
Growing volume
EITF's recent announcement concerning the capitalization of
servicing-released premiums has
encouraged BancBoston Mortgage Corp. in
Jacksonville, Florida to begin offering mortgage brokers'
premiums
instead of just subsidized pricing, says Executive Vice President Mark
Johnson. "It's a
very fine line," he adds. "The more
servicing-released premiums paid to brokers, the less attractive
that
business is [to wholesaler lenders]."
Johnson notes that buying closed loans from correspondents is
another alternative, but one that is
more expensive than doing table
funding with mortgage brokers. "We're very pleased with
the
quality of loans" from brokers, he says.
BancBoston Mortgage already is providing full disclosures on its
wholesale loans, even though
Johnson says the broker fee disclosure
requirements will be harmful to mortgage brokers. Still, he
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expects
table funding to continue growing. Currently it makes up 15 percent of
BancBoston's total
retail and wholesale volume, and is increasing.
Table funding began on the West coast for
BancBoston Mortgage and then
spread to the Atlantic coast. Johnson says the firm's next
tablefunding office will open in the Midwest or Southwest.
Quality control expenses are high on wholesale loans, according to
the wholesalers surveyed.
Employment and credit are reverified by
BancBoston Mortgage, and at times, another appraisal is
ordered. But
Johnson says these expenses "are substantially offset by the lack
of fixed costs" when
mortgage brokers are used for originations.
"They are the lowest-cost providers" of home loans, he
adds.
BancBoston Mortgage prepares the closing package through a document
preparation service, and
issues closing instructions. Loans are sent to
BancBoston for review prior to funding. Although a
few brokers would
prefer to manage their own closings in order to be able to cater to
customers'
schedules, their complaints about service are not
overwhelming, says Johnson. BancBoston is able
"to get docs out
rapidly."
Fraud worries
Table funding accounted for the majority of last year's
production at America's Lending Network,
Inc. (ALN) in Fairfax,
Virginia, says President Alexander Schultes. ALN is the mortgage
banking
unit of Standard Federal Savings Bank, which was placed under RTC conservatorship in
October.
Yet, because ALN is a separately capitalized entity, business is
proceeding there as usual, according
to Schultes. Capitalized servicing
premiums have not caused problems for ALN, he notes. However,
during
times of high prepayments, loans potentially could leave the servicing
portfolio before the
premiums used to acquire them have amortized, thus
exposing the servicer to losses.
Due to concerns about fraud, table-funded loans always close in
ALN's name rather than the
originator's, Schultes says.
However, he plans on further reducing opportunities for fraud by
tying
correspondents into the automation system used by ALN's retail
origination arm, America's
Lending Center. Schultes then envisions
offering to fund in the name of correspondent firms. He
adds that ALN
has been fully disclosing all correspondent compensation, as now
required under the
RESPA rule, since late in the summer.
Two types of
closings
Although it will originate over $2 billion this year, just $100
million of Chase Home Mortgage
Corporation table-funded business will be
funded in the broker's name, says Senior Vice President
Tom Glenn.
He explains that over 85 percent of Chase's wholesale business
comes from jumbo
loans, and that brokers have less need to close jumbo
loans in their name.
"On conforming loans, they want to be known as the
lender," Glenn says. "But on higher loans sizes
it is
generally recognized that you need a special investor." Therefore,
brokers are not hesitant to
close those loans in the investor's
name. Glenn believes two types of correspondent relationships
could
evolve, depending upon whether the broker or the wholesale controls the
closing.
"While we do not currently specify a minimum net worth, we do
control the closing process and look
to the agreement to protect us in
the event of fraud and/or early payment default. If the broker were
to
control the closing, it would make sense to have criteria similar to our
flow wholesale program,
which requires a minimum net worth and stronger
reps and warranties," says Glenn.
Under the broker controlled closing process in which the loan
closes in the broker's name, closing
instructions, plus the
endorsed note and assignment would be faxed to the wholesaler before
any
funds would be disbursed. By controlling the closing, the brokers would
benefit in two ways;
they could provide better service to their
customers and could have an opportunity to earn and
collect document
preparation fees.
The additional risks associated with a large table-fund program are
credit and financial-related.
Closing instructions issued by the broker
to the closing agent, which are incorrect or that have
partially omitted
the terms of loan approval granted by the lender, are of concern.
Additionally,
there is always the risk that a loan will be closed
without a proper endorsement or assignment.
Although the documents will
eventually be corrected, a marketing loss due to a missed shipment
could
occur.
Starting small
Expansion of Norwest Funding, Inc.'s table-funding program has
itself been tabled until the
regulatory and accounting issues have been
cleared up. "We'd like to see how it shakes out, so that
when
we expand, we make sure we do it correctly," says Vice President
James R. Loving.
Differing rules and enforcement policies being used by various
regulatory bodies not only cause
confusion, but "may turn into
additional costs that will be passed on to the consumer," says
Loving.
He thinks lenders "will become more conservative" due
to the uncertainty.
Currently, Norwest offers table funding just to a handful of firms
near the firm's home office in
Minneapolis-St. Paul. "It
provides for better control to work with lenders that we know,"
says
Loving, who explains that "you're dealing with a small
lender with a very minimal net worth."
Roughly $500 million in
production will be table funded by Norwest this year.
"You like to say you have repurchase contracts," he adds,
but Loving isn't sure how realistic that is
when dealing with
thinly capitalized firms. In contrast, the net worth requirement imposed
on
Norwest correspondents is $500,000. But he notes that in several
years of providing table funding,
no loans have been repurchased.
Only "brokers with the strongest reputations" are
considered for table funding, notes Loving, who
adds that a
broker's commitment to weathering both good and bad times is
important. When
negotiating agreements with brokers, Norwest bases its
price on both loan quality and the
percentage of business that a broker
will produce.
Too many problems
Just four correspondents have delegated underwriting authority and
draw their own documents
before Plaza Funding in Santa Ana, California wires funds to the table, says Executive Vice President
Phyllis Downes.
Generally, Plaza underwrites its wholesale loans and then prepares
documents in
its own name.
Downes says that problems in getting follow-up documents needed to
complete the file - such as the
closing HUD-1 statement and recorded
deed-of-trust - have discouraged Plaza from funding in a
broker's
name. "Most loan brokers have no capacity to buy back their
loans," she adds. Even so,
avoiding table funding and aggressive
accounting techniques hasn't stemmed Plaza's recent
growth
pace, which has been one of the strongest in the business.
In January, Plaza will disclose broker compensation paid to brokers
unless it is purchasing a closed
loan, says Downes. These disclosure
requirements could cause problems for table-funders, she
notes.
Many lenders started table funding under the impression that those
deals weren't subject to RESPA
disclosure guidelines. Now that they
are, it will be up to the market to find a new response to
today's
situation.
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