Originators create composite unity for investor marketplacePatrick Weaversub-prime, legislative, economic, political, mortgage-backed securities
Changes in past year serve to strengthen entire industry
going forward
The trying times our industry has been experiencing this year,
particularly in the sub-prime sector, may well be viewed in
hindsight one day as a relatively normal -- albeit large scale --
underwriting recalibration.
Although much recent discussion has centered on legislative,
economic, political and even social concerns related to the
sub-prime sector, the issue ultimately comes back to the core loan
approval process and whether a proposed home finance request should
be granted.
A loan originated at the broker level or through some other
respected channel still involves a relatively simple risk-benefit
paradigm that must estimate whether a particular financial
relationship will be a sound one within the limits of such
anticipations. Originators -- lenders and brokers alike -- on the
frontlines of the loan-making process have to conclude whether a
financing request should continue through the multi-layered and
often daunting process that finally produces a closing. That's
where managing and mitigating risk through underwriting excellence
can separate good outcomes from bad, and finally spell the
difference between the success and failure of the organization.
There is widespread awareness of what has happened to the
industry in the last year; what now needs to be addressed is how we
restructure our business models to move on. The new market in which
we operate requires all of us to tighten our guidelines and remain
faithful to sound underwriting practices.
The lender-investor relationship also has changed, with the
secondary market now exercising more influence over the front-end
decision-making by virtue of what can be securitized -- and for
good reason. Recently, the market saw an unprecedented number of
rating agency downgrades of mortgage-backed securities (MBS),
asset-backed securities supported by home equity loans and
collateralized debt obligations containing residential and
commercial MBS.
While we may all pursue revenues and profits individually,
lenders together create a composite unity that sets the tone for
how the investor marketplace will interact with each of us. Just
this year, in fact, we've seen dozens of lenders disappear, mostly
from poor underwriting and planning. As a result, by next year, the
top 10 sub-prime lenders will control 80 percent of the market --
up from 65 percent in 2005 and 55 percent in 2000.
Collateral damage affects the whole
sector
No one has escaped the market's contraction and too many good
companies suffered the worst blow -- closing up shop, examples of
the collateral damage affecting the whole sector.
Even the big players are not immune to the vicissitudes of
today's environment. Countrywide Financial
Corporation, a bellwether leader in our sector, saw a 37
percent decline in net earnings in the first quarter of this year.
The company's mortgage banking revenues from sub-prime operations
plummeted some $400 million in the first quarter of 2007 from those
of the fourth quarter of 2006.
Undeniably, the foreclosure trends we are seeing today are the
result of a departure from sound underwriting guidelines, increased
exceptions and an overly optimistic view of borrower credit and
market appreciation.
As originators pick their way through and around the changes
coming at them fast these days, it is worthwhile to consider what
regulators have said, especially in the form of guidance about what
we should be offering consumers.
Last fall, in a widely anticipated announcement, five federal
regulatory agencies issued a single policy document called
Interagency Guidance on Non-traditional Mortgage Product Risks,
addressing numerous concerns related to mortgages that permit
borrowers to defer repayment of principal, and sometimes interest
as well. A nearly 9,000-word declaration, the guidance was issued
jointly by the Office of the
Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of
Thrift Supervision and the National Credit Union
Administration. It established several safety measures for
lenders that are designed to lessen the risks posed by these
[non-traditional] loans.
Market beset by changing expectations
But safety measures imposed externally can only go so far in
righting a market beset by changing expectations on the part of
regulators, consumers and investors. Rather than establishing
ability-to-repay standards on sub-prime mortgages, lawmakers may
want to acknowledge how much we, as an industry, have done to make
homeownership more than a dream for many Americans, established and
newly arrived.
Lenders and brokers who have been the bridge for these citizens,
enabling them to attain the financial power to enjoy housing
security, now can revive those possibilities with a renewed
commitment to sound underwriting principles designed to mitigate
risk not only for consumers, but investors as well.
Arguably, the actions being taken by lenders, regulators, trade
organizations and consumer groups will help sub-prime borrowers
avoid foreclosure, but must also protect the borrowers right to
choose and thus the right to pursue, or maintain the dream of
homeownership.
The efforts of the National
Association of Mortgage Brokers, the Mortgage Bankers Association, Fannie Mae, Citi, JPMorgan Chase and others
demonstrates a willingness to be good citizens, as well as
practical business people. Our collective and continued concern for
both the borrower and market liquidity will temper spurious debate
and instead focus our energies on solutions.
The change we have all experienced this past year should serve
to strengthen us going forward as we learn from our past and become
even more successful in the future.
Patrick Weaver is president of California-based Quality Home Loans. He
may be reached at
[email protected].
