Mortgage Broker Round Table Focuses on Bad Credit Home Loan Market

This week’s featured story from Broker Magazine focuses on a round table of home mortgage brokers. They discussed the state of the subprime mortgage market. Let’s listen in…
At the SourceMedia Nonprime Symposium in Las Vegas, the participants said all bets are off when it comes to subprime.

The brokers were:
Blaise Dietz, president and chief executive, Creative Mortgage Lending
Rick Glass, RT Glass & Associates
David Matthews, senior vice president, chief information officer, Federal Home Loan Bank of Chicago
Merle Sharick, director of sales, Mortgage Asset Research Institute.
Moderators: Mark Fogarty and Brad Finkelstein.

BRAD: During a panel at the conference, Blaise said something that I found interesting. He said wholesalers need to educate their brokers to the new reality out there. Has it been hard for originators to understand that [bad credit mortgages] today are not the same as they were on Nov. 1, 2006?

BLAISE: With the products going away, they are either learning to market better or they’re educating their borrowers to what other options they have or they are committing fraud to get that loan placed. It is not just the originators, but the wholesale account executives, they are salesmen also and a lot of them don’t understand the changing landscape. It is not just Creative Mortgage Lending’s policy or this one institution’s policy, it’s all of the institutions.

It is the new unfolding landscape, and you are either going to educate yourself and your customers, or you’re not going to be in this business.

DAVID: That is also a point. I suspect a lot of them are leaving the business, just as you saw people leave the business when the prime market fell out. Those that shifted from prime to subprime are now realizing they are not going to make it in subprime and they’ll go back to being mailmen or auto mechanics or school teachers or whatever they were before they got into the mortgage business.

BLAISE: Well, the bigger companies are stricter than we are, because they are not selling to seven different institutions (like CML does on a correspondent basis). They are too big to do what we do. So they are evaporating from the industry, which is good.

MERLE: It is like a lot of other things in the industry. When New Century takes the action that they did or Fremont takes the action they did, you are either going to get out of the business, you are either going to get out of the business or you have got to go find some other place to place your loans. Our subscribers are telling us, the applications are just, particularly the prime customers that we have, they’re applications from brokers who want to get into get into the prime business or reverse mortgages has just exploded.

They are trying to check those folks out as best they can. There is going to be a correction in the industry and it is going to involve people and companies and certainly products. That is the first thing to go. One lender told me underwriting guidelines are changing on an hourly basis.

BRAD: Are the early payment defaults being reported to MARI as fraud?

MERLE: The early payment default information in the annual report (MARI just issued) is information we got from (First American) LoanPerformance. We don’t track early payment defaults. A subscriber in a submission may reference something to do with early payment defaults if it is akin to a particular broker, a predominance may have early payment defaults, but we don’t track early payment defaults.

BRAD: Merle, from your presentation, it seems the prime loan EPDs come from areas where there has been some sort of natural disaster, like the Gulf Coast area and Hurricane Katrina. But in the nonprime side, Jackson, Mich., was the No. 1 area for EPDs, which might tend to show much of the EPDs are a result of fraud.

MERLE: That is a possibility. But when you look down that list - Jackson, Mich., Enid, Okla., Kankakee, Ill.-those aren’t big metropolitan areas. That shows you what we talked about in (MARI’s 2006) report, that the fraudsters are moving out into other areas. I think the EPDs in the subprime area may be a combination of some fraud or misrepresentation, and it may be the wrong loans to the wrong people in the wrong places with a dash of predatory lending thrown in there.

I talk with a lot of nonprofits and they are working with folks that the nonprime loan is really a loan that fits them if they are not being taken advantage of. They counsel these folks for years and it is ruined on one Saturday afternoon when some guys float into the neighborhood with laptops. They crank out a deal, throw all the fees back in. People just worry about, “Can I afford the payment.” So they get a payment they can live with, they ruin four years of counseling that the nonprofit has done. What they don’t understand and they will at a later date is all those fees those guys got of the deal is loaded back on (the loan).

MERLE: On our list for subprime loans, Detroit is the only big city. They focused on somewhat rural areas or unknown areas or in these major cities like Detroit or Oakland and places like that, disadvantaged neighborhoods.DAVID: Lower-income neighborhoods. Chicago had a spate of that. That was fairly well publicized not long ago. It was former gang members who reformed and got into the [Illinois mortgage] industry. They changed gangs. They put on suits as opposed to colors.

BRAD: Blaise, you are from the Detroit area. Is your company receiving a lot fraudulent applications and/or are you discovering things post-closing?

BLAISE: At application we are pretty good at catching it. But Detroit has had such a major issue with property values declining and with all the equity that has evaporated through cash-out refinancings rolling in $8,000 in fees on a $100,000 loan. The property values have come down so dramatically we seem not to be able to approve a loan in Detroit. We see fraud the most, we are only in eight states, 18 soon, is in Florida, where it an unbelievable amount of fraud.

MERLE: You kind of hit on something earlier that has created some consternation in the marketplace and that is a concept I’ll call equity stripping. Folks have gone in and refied so many times, for legitimate reasons or for vacation or some other kind of expense. Those are the folks I think that are going to be in or already are in a really challenging position right now, particularly if they had an option ARM that is going to roll pretty soon and they don’t have enough equity left in the property to be able to mortgage refinance.

So they are going to have to look at what their option ARM adjustment, what their property value is going to be able to afford. We went through a period of time in those refi waves where everybody said “take all the equity out of your house.” That was the investment strategy. It was the strategy amongst a lot folks in the financial world. Get as much out of that house you possible can.

BLAISE: Stick into an equity investment.

DAVID: Take your credit card debt and put it into the mortgage so you are somewhat collateralized.

MERLE: That doesn’t help when you are in the kind of marketplace we’re in today, that is constricted, that has an issue in the nonprime world, that has appreciation, that has slowed down or stopped in a lot of markets. That is a big issue for a lot of folks. They don’t have any place to go.

RICK: When Alex Pollack, the former president and CEO of the Federal Home Loan Bank of Chicago, testified before the Senate banking committee, he said “when the prices continually go up the risk of loan seems much less and that is when people think it is OK to lend as much as you can. It is part of the cycle, right?

MARK: Inflation bales out bad underwriting.

DAVID: Is there a layer of operational issues associated with the EPDs as well? Did some of these companies grow too fast and not have their origination and servicing operations linked together well enough where some of the EPDs were from people’s payments getting lost in the shuffle from home loans moving around?

MERLE: I think there is some of that. When the markets were rocking and rolling, I don’t think paid a lot of attention to anything. They cut corners to get those loans processed. They threw them all in a pile in the corner and said we will take care of them next month and get all the processing done.

When it slowed down, those were still in the corner. Everybody was scrambling around asking, “How do we continue the production we have.” I think servicing comes under examination in these kind of markets and kind of times. That is why I think one of the agencies a few years ago created a special servicer designation, because they said there is a difference in how people look at it.

DAVID: There is certainly a difference in servicing subprime vs. prime. You need to be much more proactive with the subprime customer.

MERLE: It is a fallacy to say the same underwriter can underwrite a nonprime loan and a prime loan and that is happening in some shops.

When the companies decided, New Century, for example, decided it wasn’t a good thing for them to continue lending, they just stopped. And when they stopped, you have to know some of those loans they had in process were good loans. But the reaction was such that it stopped. It was like the savings and loan industry in the 1980s. San Antonio Savings is a perfect example. They volunteered to help out the Resolution Trust Corp. by taking over some of the (failed savings) associations. RTC said we want to come and audit you first. They came in and audited them and said you guys have got too much committed to one builder and declared them insolvent and took them over. When the market stops, it stops.

DAVID: Clearly, there are enough firms that are doing rollups, people are buying companies, so there is still an interest.

MERLE: I get calls every week from our subscribers who are saying, “We haven’t been in the wholesale business, but we’re thinking now is a good time to get in. We’re thinking that the alt-A mortgage and nonprime stuff makes some sense.” There is still a need for that product. That is the underlying part of this. There is a huge need in this country for a product that makes sense for borrowers that make sense. There is going to be some great opportunities for folks.

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