Reality checkJoe Amorosomarket, Alt-A, sub-prime
I've often remarked over the years that many people in the
mortgage industry tend to have short memories. It's like a
"selective amnesia" that happens every five or six years. When
business is booming, people forget that the market is cyclical, and
then they're shocked and reeling when the party's over.
There is no question our industry is becoming more and more
conservative in terms of underwriting and pricing. Gone are the
days when investors securitized practically everything that came
their way. Investors have tightened their belts, and we're all
feeling the effect on our business. No one is immune.
To borrow from an old Beatles song, we need to "get back to
where [we] once belonged." What we're seeing is a return to the
standards and guidelines that belonged to Alt-A before we started
moving sub-prime borrowers into Alt-A, for example. What we're
dealing with now is a reality check of the industry.
Brokers are under the microscope
It's inevitable that a shift had to happen and terms had to circle
back. Markets have become far more efficient. As investors get
closer to the street, they're looking with an intensely critical
eye at our loans. Every investor is re-examining his specific
guidelines. In turn, wholesalers are starting to look more closely
at brokers' financials and imposing stricter requirements in order
to do business.
Additionally, the secondary market is not as cooperative as it
once was. With loan quality being scrutinized more closely than
ever, we're seeing a considerable narrowing of specific paper being
bought. Many are now struggling with how they approach writing
loans. All of this has set the stage for a recalibration of pricing
and tougher rules.
Driving the change in guidelines is performance. We're seeing more
problems with stated-income loans and second mortgages. Defaults
and delinquencies are up. Some companies are being forced to drop
their second mortgage programs entirely. They are raising their
FICO requirements and getting tough on stated-income loans. All of
these tactics are, of course, directly related to the poor
performance of these loans.
I expect that as bad loans get pushed back to brokers,
"buy-sell" agreements will garner more attention. It's a natural
evolution. Companies will start emphasizing this kind of set up in
response to performance issues.
Consumers are under the microscope
Clearly, many loans that once passed the litmus test as acceptable
will no longer flyboth with investors and consumers. Now more than
ever, customers are more educated and are shopping for rates. As
part of the educational process, they can expect that their
financials will also come under closer scrutiny. Today, borrowers
looking to finance a loan face higher FICO score requirements and
more stringent reviews of their income than just a few years
Brokers know that in order to capture business, the rules of the
game have changed and the ante has been upped. Let's say a rookie
loan officer takes an application from a couple and automatically
submits it as a stated-income loan because it's an easier route. He
doesn't want to deal with the paperwork involved in an income
verification loan. This is a mistake few can afford to make if they
want to remain viable and competitive.
In today's market, that loan officer stands to lose the deal to
another broker down the street who takes the time to examine the
products available and find the best fit. The loan officer's
competitor explains to the couple the benefit of supplying
financials and gets their loan approved as a verified-income loan.
He has essentially lowered the borrowers' rate by 75 basis points
by submitting a full-doc bid. Guess what? They get the
Examining the gray
Lastly, the gray area between Alt-A and sub-prime keeps getting
grayer. Brokers have to be more aware of the packages they are
sending in and examine each case individually to determine if
sub-prime borrowers can actually fit into an Alt-A product. Educate
the consumer as to his borrowing options and place him in a loan
program that really makes sense for him.
During this cleansing time in our industry, the basic tenets of
our business hold true: find the best product for your customers,
educate borrowers about the tightening requirements to help them
best prepare financially and examine your loan applications to
ensure they have the highest probability of funding.
And remember, even though total originations dropped off 18
percent last year, there is still plenty of business - including $1
trillion in adjustable-rate mortgages set to reset - out there
waiting for you to tap.
Joe Amoroso is senior vice president of Opteum Financial Services. He may
be reached by e-mail at [email protected]