Quality-wise originations after the downturn are generally said to be relatively good credits, but beyond that let’s take a closer look at what could shape the 2011 vintage this year.
Let me stress again, loan quality still looks relatively good compared to the notorious pre-downturn period. As Lenders One CEO Scott Stern noted, “Not only are files being quality controlled before closing, they’re being pre-underwritten, they’re being underwritten after closing. Then they’re going through all kinds of technology checks.”
Despite this, he thinks there are still at least two reasons market participants have to continue to be diligent.
“One reason to be diligent is that we’ve come through a very, very heavy refinance market over the past several months, volumes are very high and people are asked to work with very high workloads,” he said. “Of course that is often unintentional, but when you get through a very heavy refinance marketplace we need to be really diligent of eliminating errors, data entry errors and underwriting errors and processing errors as an industry.
“The other one that we need to be diligent [about] is the fact that because there have been less loans in a lot of markets and now we’re heading into a slower market that there’s always going to be people who see the potential for a slowdown in volume and a resulting slowdown in their income and say, ‘The only way I can get these loans closed is by perpetrating fraud in the file to help close the loan.’”
“Unfortunately there’s a sense of greed [that] can be at play and your sense of you’re just trying to protect people’s income to say, ‘You know what, I need to create more loans in order to still make money,’” he said. “You do see fraud increase when volumes go down so that’s something we need to be [continually] diligent [about] as an industry, especially with projected slowdowns in 2011 volume.”
As a Freddie Mac spokeswoman confirmed recently, while the average weekly rate for a 30-year mortgage has been falling, but it had not at press time yet reversed last month’s run-up. Last Thursday, it was 15 basis points below December’s high but 25 bps above where the rate was at the start of last month, before the run-up started.
As Stern’s comments show, either way rates move there are risks, albeit different ones, to look out for.
Although loan quality is better, “there still is fear” in the secondary market, Stern said, although he added that, in his opinion, when it comes to fear the perception of the issue is greater than the reality of the issue.
“The biggest fear, when we see [it], isn’t appraisal issues any more, it isn’t employment stability, all of which are issues,” he said. “But, far and away, the No. 1 thing we talk about, the No. 1 thing investors [continue to] try and guard against, is fraudulent loans.”
In addition, product parameters seem to be loosening up a bit.
Bank of Internet, for example, which recently started offering a proprietary Jumbo product on a correspondent basis for the first time in conjunction with the Capital Markets Cooperative, will not allow any delegated underwriting of the product, Brian Swanson, senior vice president and head of the residential lending division, told this publication.
The Jumbo programs that are getting underway in different loan channels are generally requiring significant reviews, Stern said. But where a certain comfort level with the product and market participants is achieved reviews may relax a little, he said.