Mortgage Scene: Does the Correspondent Lending Channel Face a Time Bomb?

There are two ways to get ahead in the mortgage banking business: (1) open a ton of branches in promising markets from coast to coast, hire talented managers, train your people and give them the tools and technology to close as many loans as humanly possible and (2) buy closed loans from correspondent lenders that have already found and funded the residential consumer.

On the surface it would appear that using correspondent purchases as a way to build production - and servicing - would be the way to go. Then again, if correspondent lending is such a fantastic idea, how come firms that rely mostly on the correspondent channel are - to put it politely - not exactly thriving?

One of the largest correspondent lenders ever, Lomas & Nettleton in Dallas, went bankrupt, not just once, but twice. I can remember when L&M sold all its retail branches telling the world that it didn't think retail lending was a very profitable production channel. Lomas was once one of the largest mortgage bankers in the U.S. Anyone who's been in this industry more than 10 years might recall the $1 million bash L&M threw at the 1986 Mortgage Bankers Convention in Dallas.

Another well-known mortgage banker that tried to go the "correspondent-only" route was GE Capital Mortgage Services in Cherry Hill, N.J. Under Jack Welch's stewardship, GE has done little wrong during the past decade. However, GE's foray into residential mortgage banking is one of Jack's black eyes, not that you can read about it in the general business press which seems to fawn all over Welch.

GECMS's strategy was similar to L&M's: buy a ton of closed product, grow your receivables base and use economies of scale to increase profits. HomeSide, Jacksonville, Fla., under recently retired chairman Joe Pickett, has employed the same strategy. Where's GECMS today? The $80 billion servicer sold ...