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].
