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From the sidelines ... to the game: Getting to know NAMB President-Elect Bob Armbruster

Oct 12, 2005

The sub-prime forum: The key to closing more of your sub-prime loansRichard Bitneradvice,closing sub-prime loans Welcome to "The sub-prime forum," a new column designed to help improve your knowledge of alt-A lending and offer tips to increase your share of this lucrative market. As a 12-year veteran of the industry, Richard Bitner has a wealth of experience working in retail, wholesale, and correspondent sub-prime lending. He has served as the president of Kellner Mortgage Investments for the past five years. As someone who has worked in sub-prime mortgage lending for more than eight years, I've had the opportunity to watch this segment of the industry evolve and mature. The utilization of technology, a broader product menu and more effective risk-assessment tools have led the entire industry to unprecedented levels of production. With sub-prime loans accounting for virtually one of every four mortgages created in the United States, this industry is showing no signs of abating. Yet, despite all of these increased efficiencies and improved offerings, there is still a tremendous amount of fallout. In my nearly five years as president of Kellner Mortgage Investments, I've heard from numerous loan officers on how a particular lender has "dropped the ball" on their loan file. In a recent conversation, a broker said to me, "Every time I deal with this other lender, I always hear lots of promises from the account executive. Once the loan is underwritten, we get conditioned for something new that ends up killing the whole deal." Can it be that the level of performance among sub-prime industry professionals is sub-par to the rest of the industry? I certainly doubt it. While any industry will have its strong and weak elements, the answer to this phenomenon of loan fallout is not black and white; it's gray. Any successful sub-prime account executive will tell you that the key to a high closing ratio is only partly related to knowing loan-to-value (LTV) and FICO scores. What really matters are all the little details behind the loan that make or break the deal. It's these details, and understanding how the underwriting department will deal with this world of gray, that separate the average account executive from the superior one. By understanding the main reasons why sub-prime loans get denied and knowing the steps needed to reduce the likelihood of that happening, you'll close more sub-prime loans and increase your efficiency, as well as your income. Sub-prime loans that get denied typically fall into one of three categories: inaccurate loan pre-qualifications, transactional issues or appraisal problems. We'll examine each one and then discuss strategies to improve your closing percentages. When discussing the topic of inaccurate loan pre-qualifications, most loan officers blame their account executive for structuring the deal incorrectly. While there is some truth to this statement, another reason this may be happening is that many lenders have added numerous account executives to keep up with industry demand. Many of these hires have minimal or no industry experience. Even a comprehensive training program may not be enough to help a newer account executive get a grasp of the gray matter that exists in sub-prime lending. But, account executives alone are not to blame. Part of the responsibility for poor or inaccurate loan pre-qualifications goes to the loan officers. For example, last month, one of my employees shared a story about a conversation he had with a new originator for a brokerage he had been doing business with for over a year. The deal was a fairly straightforward, 100 percent LTV, full-doc loan with low 600 scores. What the loan officer didn't mention was that the property was rural, with all comparables being over five miles away. Fortunately, in this instance, we did not require an LTV reduction for rural or rural-influenced property. However, the conditional approval had additional stipulations and a pricing adjustment relating to the subject property. These two issues caused the loan officer to become upset and assume that our underwriters had reconditioned him. So, who is at fault? Depending on your perspective, it could be either party. Granted, the ultimate responsibility lies with the lender's account executive to nail the pre-qualification. However, without knowing all of the relevant details, it's impossible for any account executive, no matter how effective, to issue a pre-qualification they can stand behind. Transactional issues can exist in a wide variety of situations. An example of a transactional issue would be a loan that has elements of being non-arms length. Non-arms length refers to two parties that are somehow connected with a transaction and have some other established or existing relationship. For example, when a buyer is purchasing a property and the seller also happens to be the buyer's employer, we have a non-arms length transaction. Flipped properties are another example of a transactional issue that has become more prevalent in recent months. The difficulties many lenders face with these properties are twofold. First, given the rapid levels of appreciation taking place in markets around the country, the biggest challenge is determining if the property is really worth the value assigned by the appraiser. Second, and equally important--is the transaction fraudulent? Historically, many lenders have been burned by flipping schemes. Straw buyers, over-valued properties and other forms of fraud have forced the sub-prime industry to proceed with caution. Neither of these transactional issues are deal-killers by themselves, but the key to making them work, as you'll soon see, lies with adequate communication. The challenges that lenders potentially face with appraisals are too numerous to name. But of all of the things that can make an appraisal suspect, not being able to utilize comparable sales in similar neighborhoods will cause red flags to go up with almost any lender. Here is a typical example: Our subject property is a three bedroom, two bath, 2,100 square-foot home located in a suburban neighborhood and appraised for $150,000. All three comparable sales are between 2,600 and 3,000 square feet. While all of the comparables are within a three-mile area, none of them are in our neighborhood. In addition, all of the comparables are located north of us, across a major highway, in one of two different subdivisions. The appraiser has made notes stating the comparable sales are the most recent and best available. Our house is appraised at $71 a foot and the other properties all range between $59 and $65, with all properties being deemed in average condition. With none of our comparables being located in our immediate neighborhood, and all of them being 20 to 40 percent larger in size, how can a lender tell if this is an accurate representation of the subject's value? The answer is that they can't tell. Therefore, lenders often utilize numerous automated valuation models to get a better handle on the subject's fair market value. If they are still uncomfortable with the results, they can order an appraisal review. Loan officers, experienced or not, can improve their overall closing percentages by following these basic but important steps. First, make a commitment to work with only two to three sub-prime companies, lenders, and account executives that have reputations for getting the job done with the borrower's interest in mind. Talk to originators who consistently close sub-prime loans and find out who they recommend. Remember, the proof is always in the results. Second, as you develop relationships with account executives and lenders, don't just rely on them to figure everything out for you. Take it upon yourself to understand their basic guidelines and underwriting criteria such as minimum credit requirements and collection policies. It's ultimately your account executive's responsibility to say "yes" or "no" to a deal. But the better you are at sizing up deals, the more effective you'll become at closing sub-prime loans. Third, earlier in this article, I mentioned that the responsibility for issuing an accurate pre-qualification is shared between the account executive and the loan officer. If you are going to increase your closing percentages, you have to start by disclosing as much information as you know about a transaction to the account executive. If you currently work with an account executive you consider top-flight, there is a good chance he'll spend time asking you detailed questions about the transaction, making certain no stone is left unturned. Your account executive will do a more effective job if you take it upon yourself to tell him everything you know about the deal. In addition, if there is something you are hesitant to tell your account executive because of concerns that it might kill the deal, the lender will probably find out about it, anyway. Most lenders have implemented quality control procedures and verifications on the front-end that will identify problems before closing. However, just because a property is being flipped or the transaction is considered non-arms length, doesn't mean the deal is dead. The key to making deals work is to understand the details behind each transaction. A strong loan officer will make it a point to tell their account executive everything they know about the nature of the transaction. Finally, your ability to build a relationship with a quality appraiser can save you a lot of aggravation down the road. Start by talking with your account executive and see if they can recommend someone in your local market. A strong local account executive will have a good feel for which appraisers get the least amount of push back from underwriting. By aligning yourself with a strong appraiser, you'll begin to see how a property's targeted appraised value can be consistently achieved. If you take it upon yourself to work with the most thorough account executives, understand product guidelines, fully communicate on all deals with your account executives and align yourself with a first class appraiser, you'll take huge strides toward closing more sub-prime loans. Richard Bitner is the president of Kellner Mortgage Investments, a nationwide wholesale sub-prime lender based in Plano, Texas. For more information, call (866) 416-9995 or e-mail [email protected].
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