March 23, 2017 - Originally posted on Scotsman Guide Residential Edition
There is bad news and good news about 2017. First, the bad news: According to the Mortgage Bankers Association, 2017 is shaping up to be a smaller overall mortgage market, with perhaps only $1.63 trillion of total origination volume, down from an estimated $1.89 trillion in 2016. For loan originators focused on homebuyers, however, the good news is that 2017 could be the best purchase market since 2007, with purchase volume forecasted to top $1.1 trillion.
A smaller market means that business will be even more competitive this year, as lenders and originators try to carve out a bigger piece of a smaller pie.
Most observers believe that an improving economy and a strong real estate market will be the main drivers behind the purchase market this year and probably into 2018, as well.
As the market shifts from refinance to purchase, mortgage companies and lenders of all types and sizes will be re-examining their business models in an effort to grow their businesses beyond borrowers who fit neatly into the Qualified Mortgage (QM) loan “box,” and who will be easy to identify, qualify and close.
The keys to success will be finding niches where originators can add value — and make money — by identifying underserved and under-marketed borrowers, and figuring out how to serve those borrowers efficiently.
Originators shouldn’t need to look far to find several underserved niches. Since the financial crisis began in September 2008, for example, there have been approximately 6.4 million completed foreclosures nationally, according to CoreLogic.
Over time, these foreclosures — and short sales and bankruptcies — get expunged from credit reports, making these “boomerang borrowers” eligible for new mortgages. In fact, Experian estimates that by June 2017 approximately 2.5 million boomerang borrowers will be candidates for new mortgages. Who will step up to help these borrowers?
Another group that needs help is young renters. For the past few years, rent growth has outpaced home-price appreciation in many markets, making homeownership more attractive to younger, first-time borrowers. Many of these borrowers, however, are struggling with downpayments and debt ratios inflated by student debt, which makes it hard to qualify them for mortgage loans. They will need the guidance of seasoned professionals.
Finally, the last groups that are often hard to fit neatly inside the QM box are self-employed or commission-based professionals and borrowers looking for loan amounts above agency limits. Because their loans cannot be sold to the agencies — Fannie Mae and Freddie Mac — as QM loans, these borrowers create more opportunities for originators who are comfortable working in the non-agency, non-QM origination space.
“By June 2017 approximately 2.5 million boomerang borrowers will be candidates for new mortgages.”
An originator’s ability to serve these hard-to-fit borrowers depends not only on skill and knowledge, but also on good working relationships with investors and wholesale lenders.
As Milton Berle once said, “If opportunity doesn’t knock, build a door.” And that’s what some wholesale lenders have begun to do, particularly in the case of non-agency originations. They’re offering non-agency portfolio products such as jumbo prime, near-prime/subprime, construction, nonwarrantable condo/mixed-use, investment property, foreign national, physician’s loans, self-employed, etc.
Since the financial crisis, the non-agency share of residential mortgage-backed securities (RMBS) has ranged between 1 percent and 5 percent of total issuance. To provide some perspective, in a more normalized market — and not the “go-go” days in the run-up to the mortgage crisis, but rather the mid-1990s and early 2000s — non-agency RMBS represented about 20 percent of the total. So there is plenty of room to grow as the economy and housing market improve.
One of the challenges with non-agency originations, historically, is that they lacked automation. Agency originations are a different story with Fannie Mae’s Desktop Underwriter (DU) and Freddie Mac’s Loan Prospector (LP) underwriting systems providing easy access to automation. Originators know what loans will get approved (or not) through DU and LP because they do those loans daily.
Unfortunately, similar automation for underwriting non-agency loans is not nearly as widespread, but this is changing. Having an automated underwriting system (AUS) available for non-agency loans at the point of sale will help improve loan consistency, which is vital because of the heavy focus on regulatory compliance in recent years.
Despite the new administration’s desire to loosen mortgage regulations, more are still in the pipeline. The industry is still waiting on final rules for proposed amendments to the TILA-RESPA Integrated Disclosure (TRID) rule as it prepares for the new Home Mortgage Disclosure Act (HMDA) data-collection requirements scheduled to take effect in less than a year. Being able to demonstrate that a consistent, quality underwriting process is used to manufacture assets is essential for complying with these rules.
"Many mortgage companies continue to believe they have to submit non-agency loans manually.”
In addition, an AUS can help originators stay abreast of their wholesale lenders' ever-changing guidelines. Loan originators may work with up to a dozen wholesalers. Each wholesaler has extensive guidelines and, because most originators don't submit non-agency loans at the frequency they do agency loans, they may not fully understand the programs available.
Many originators can't figure out what information to submit to a niche wholesaler, and what not to submit. If an originator puts together a loan package and submits a borrower who gets denied, then everyone loses. The originator and borrower waste time completing the application and gathering the documentation. Underwriters waste time on dealing with unqualified loans and going back and forth with originators about guidelines that were not met.
On the other hand, when originators are too conservative or play it too safe because they have been burned before, then money gets left on the table because they don’t consider or present alternative loan products. Every month, originators turn away borrowers who have had recent foreclosures, short sales, or bankruptcies, even though they think those borrowers have the ability to repay going forward.
Matching hard-to-fit borrowers with the right investor is much easier with automation, but many mortgage companies continue to believe they have to submit non-agency loans manually. Ideally, these companies should build relationships with wholesale lenders that embrace technology — particularly in the areas of automated underwriting and pricing. With automated underwriting, originators can know if the two weeks of time and energy they spent on a non-QM loan has been worth it, because the likelihood that it will be approved is high.
Likewise, a state-of-the-art pricing engine gives originators confidence in dealing with investors and borrowers. No originator wants to go back to a borrower and say, “You know that 6 percent interest rate mortgage I found last week? I missed a loan-level price adjustment and the interest rate is actually 6.5 percent, so your monthly payments will go up $500.” Most borrowers will think this was a bait and switch or that the originator is inexperienced or unqualified. Either way, the relationship is soured.
Innovative wholesale lenders are deploying decisionmaking technology at the point of sale that effectively allows mortgage companies to “test drive” the wholesaler’s offerings to determine whether or not they want to establish a relationship. Originators can go on the lender’s website — without being approved — to see live pricing, input limited data and get an immediate indication of whether loans would be approved.
The traditional approach followed by many wholesalers, unfortunately, is to put their pricing and underwriting technology behind a firewall, so only approved brokers have access. There’s no way to try out the wholesaler or their specific product offerings. This can be problematic if an originator begins submitting 10 files a month to this new wholesaler, all of which are ultimately denied because the originator didn’t understand or read all the guidelines.
These “false starts” increase operating costs, trigger HMDA filings and foster bad will. In addition, some wholesalers rate the mortgage companies they work with based on pull-through ratio. Companies that submit a lot of files that never pull through will get rated lower and are penalized on pricing. Automation and test driving can alleviate these concerns.
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Originators today have access to a lot of non-agency and niche products. In a shrinking market, mortgage companies will need to find wholesale lenders that have a creative and expansive suite of niche products, so their originators can offer more options to help hard-to-fit borrowers. Companies looking to seize non-agency opportunities also should look for forward-thinking wholesalers that offer products and technology that make it easy to reach those borrowers so they can close more loans.