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NovaStar introduces five-year hybrid option ARM

National Mortgage Professional
Jun 08, 2007

Will Wall Street still have an appetite for sub-prime loans?James L. Smithconservative, stricter, valuation credit, diligence standards, pre-certification program As someone who's involved in mortgage portfolio investment, I've been spending a lot of time answering the same question: Will Wall Street continue to have an appetite for sub-prime loans in view of the industry's recent collapse? My answer is yes, but ... The "but" is that the market will continue to invest, but we're also expecting investors to tell the sellers that they'll be taking a more conservative approach to sub-prime loans. According to meetings I had with Wall Street investors, they'll be very careful about what they buy and will institute a more conservative diligence practice around the loans that are purchased. What that means to lenders is that these investors will be stricter about their purchase guidelines and will grant very few, if any, exceptions to them. Historically, what people in Wall Street firms would do with sub-prime loans is to take a small sample of the loans in a package and perform a diligence review of valuation credit and compliance. For example, a firm would take a sampling of around 10 percent for diligence. Not now. Sellers can expect a significantly larger sample selection that could be up to 100 percent, and the sample selection will be based on whom the sellers are, along with the characteristics of the pool. The old adage for sub-prime loans was that you made the loan on the property, not on the borrower. By definition, many sub-prime borrowers had distressed credit, so those providing loans to sub-prime borrowers had to put an additional focus on the value of the property versus relying on the borrower's credit. Historically, there has been some tolerance between the appraised value of a property and the diligence value. If the property value was $100,000 based on an appraisal and the diligence value came in at $90,000, the 10 percent variance between the two, most probably, would be accepted, but not now. Today, the value of the property would be $90,000. In other words, the due diligence value would trump the appraised value. Advice to lenders So what does that mean to lenders? Know your investors and know where your programs stand with them. Here are a few concrete suggestions for moving forward in the new sub-prime environment. -Understand your investor's new diligence standards. Expect those standards to be more conservative. You should also know that investors are more than happy to share those with you. They don't want to kick loans out of the pool you bring them. Make sure you keep the lines of communication between your investors and your institution open so you can meet their needs and yours. -Have independent diligence companies who have appraisers and underwriters participate in the review for the valuation and underwriting of loans prior to selling them to the investment community. When we do this for lenders it gives their investors a comfort level that comes from having an independent, unbiased party establish the value to support property values and borrowers' credit worthiness. -Find out if your investors have a pre-certification program. Many Wall Street firms are establishing pre-certification programs where they are using companies like ours to revalue or audit property values before accepting them. Ask your investors if they have such a program in place and how you can participate. This audit allows the investor to have a comfort level before they purchase the loan package. -Vet any new loan programs with investors before you roll them out. Investors will tell you exactly what you have to do to make your loans more appealing to purchasers. Many investment firms will give you feedback on the programs before you roll them out. That way you can change the program to avoid having loans that you can't sell after you've originated them. -Readdress your current loan programs to make sure investors have no issue with their characteristics. Everything's going to tighten up. There's a concern in the market-place about all originations, so make sure you don't need to change any of your current programs before it's too late. This brings us back to where we started. Will Wall Street continue to participate within the sub-prime industry? Yes, but ... the "but" is that lenders need to know what loans they'll want and alter their lending programs to account for them. James L. Smith is executive vice president for Fiserv Lending Solutions-Portfolio Services. He may be reached at (720) 565-9474, ext. 3306 or e-mail [email protected]
Published
Jun 08, 2007
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