Friday Funding is a HousingWire web series profiling the lending segment in depth, and highlighting the operations and the people that make this sector tick. In the latest installment, we sat with First Guaranty CEO Andrew Peters to learn how FGMC creates a solid correspondent platform to build from.
Housingwire:Who is your target customer and why are they a good fit for your business model?
Peters:FGMC targets a wide range of customers: small brokers, bankers, community lenders, credit unions, small or mid-sized banks, large players on the capital markets side and many, many others in between. Because FGMC offers quite a few niche products and is willing to entertain any pool of performing loans as well as servicing portfolios, we find quite a few good fits with a large number of companies out there.
HW: How does lending fit into your overall business strategy? In other words, what other lending divisions do you have, i.e. warehouse, wholesale, ect.?
Peters:FGMC has retail, wholesale, correspondent, and capital markets on our platform. We feel the correspondent tie-in is perfect: it really helps develop relationships when you can walk into any shop and offer broker, mini-correspondent, delegated and non-delegated correspondent, mini-bulk and bulk bidding as well as servicing acquisitions.
HW: What do you see as the greatest challenge(s) your clients face today?
Peters:Over the last month or so it has been MBS volatility–hedging for a seller in this market can be a very difficult scenario. Longer term, it is the ability to backfill the shrinking refinance pipelines with purchase business and maintaining profitability. Also, how does that play into staffing and operational decisions? I think the consistency in the capital markets over the last 18 months may have lulled some into forgetting how truly difficult this business can be and how quickly things can change.
HW: What made your firm decide to ramp up its correspondent division?
Peters:There were many factors that played a part in that decision, but the largest included having the right people to run it; having the necessary pieces like GNMA and FNMA approval in place and having the right servicing platform to manage the portfolio. I think it is difficult to have a successful correspondent platform over the long run if you are turning around and selling the product servicing released. If you want to scale you have to have a solid servicing platform. Product, pricing, and production are the easy parts. Due diligence, post production, final docs, servicing, and secondary are the pieces many seem to forget. If you have those down cold, the rest can be filled in.
HW: How broad of a market do you serve today and what does the next 12 months look like from an expansion standpoint?
Peters:FGMC is purchasing and servicing closed loan production in well over 45 states today. Any client that is closing or aggregating mortgage loans is a possible seller. Over the next 12 months, FGMC will continue to grow our sales and marketing platforms and back those up with solid pricing, products, and operational support. At minimum, we expect to double our current production.
HW: There have been a lot of new entrants into the correspondent market over the last 12 months, what is going to be the key that helps your firm rise above the rest?
Peters:I believe we have a superior back office operational support structure for due diligence, loan purchasing and reporting to clients. Sellers want an efficient model that is consistent and we have built that. Now, we are adding top flight sales teams to go out and onboard new clients daily.
HW: With the increased competition in the correspondent arena, what do you think is the single most common mistake you see other correspondents making?
Peters:Making a snap decision to open up a correspondent division. Rolling out very competitive pricing without a baseline for profitability or operational efficiencies. FGMC started its correspondent group two years ago, and we made sure that we had a 24 month run of solid profits and operational efficiency before we even considered scaling…which is where we are today.
HW: Tell us about the team you are building and who sits at the core of the operation?
Peters:Outside of our executive leadership team, there are four people at FGMC who truly push the third party origination (“TPO”) machine daily. Mark Mayhook is the director of Capital Markets focusing on running our trading desk (mini-bulk and bulk pools, servicing acquisitions, and whole loans trading as well). Jeff Gibson is our director of Correspondent Flow (whole loan flow). Jessica Rivera is avp, National Due Diligence Manager. Juan Rodas is svp, Secondary Markets Manager.
HW: Correspondent lenders are paying a high premium for loans. What do you see happening to spreads over the next 12 months? How will rising rates impact your business?
Peters:Margins will tighten – bottom line. That is why you had better have a track record of are just now rolling out a correspondent platform because you saw some of your peers making a great return in late 2011 and 2012, you may well be facing for a rough road. At FGMC we have realistic expectations for profits and couple that with our want to build our servicing portfolio, which has really worked for us.
HW: Finally, with all the new compliance and regulation rules coming out, how will new compliance rules impact your business? What are you doing to stay on top of compliance, i.e. technology, new software, ect.?
Peters:The rules of the game are ever changing, but you must have a compliance officer who is fully vested in the TPO platform. You also should have, at a minimum, one or two compliance vendors and one or two outside counsels at your disposal. Technology and software can help, but correspondents who are retaining servicing are open to issues on many more levels than others. It takes access to multiple experts and constant self testing to ensure you are ahead of the game. It all goes back to having an 18-24 timeline of profitability inclusive of compliance costs, so when the market tightens, you know exactly where you need to be to be opportunistic.
To visit previous Friday Funding coverage, click Prospect Correspondent Lending, HomeBridge, Guardian Mortgage and New Penn Financial
