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. Performance dictates 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 ago. 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 business. 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].
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