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Mortgage closing delays expected as BofA shutters correspondent program

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Nearly $180 billion in home loans were purchased by Bank of America, half of it's origination volume, in 2010. Those home mortgages were originated by the thousands of brokers and correspondent lenders who sell to the financial giant and who have depended on BofA to provide the funding for their approved mortgage closings.

Many lenders do not use their own funds to close mortgages and instead use the pass-through method whereby they originate and underwrite in-house but immediately sell to larger banks and non-depository lenders on the secondary market. Brokers and lenders who are approved to fund this way are called correspondent lenders.

Correspondent lending is neither new or dangerous to the economy as the loans issued are required to follow the investor guidelines, in this case Bank of America, and often include risk reducing overlays established by the originating lender. Losing this outlet for selling loans will open the opportunity for other investors to purchase the loans BofA would have otherwise acquired but will also result in, at least temporarily, a back log of borrowers whose loans are delayed as originating lenders, including smaller banks, shop for an investor to purchase the loan at or immediately after closing.

Well capitalized lenders will be able to hedge and hold the loan in house for a short period of time until a suitable investor is found.

Fannie Mae and Freddie Mac are also investors but have experienced their own troubles over the past several months which has resulted in a slower funding and lower volume of purchasing from the retail and wholesale markets.

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