PARADISE ISLAND, Bahamas - Even with the current high refinancing environment, which typically leads to relaxed underwriting standards, there is an increasingly better credit mix in subprime mortgage pools, said representatives from the top mortgage originators at last week's 2002 ABS East conference, hosted by the Information Management Network.
Panelists noted that FICO scores are historically high in recent pools. This is no surprise, they said, as originators are tightening up given the current credit environment, and the flood of supply is allowing them to cherry pick.
Panelist William O'Neill, chief executive officer at Option One Mortgage Corp., said that they have tried to discourage low balance loans, which, in turn has led to stronger FICO scores.
Washington Mutual has also seen better FICO scores in its pools, though the firm does "not focus on just FICO, but it is a factor in our pricing and risk profile," said Jeffrey Sorensen, first vice-president at Washington Mutual.
The improvement in the credit mix of these pools comes at a time when subprime origination is booming. Originations in sector are expected to rise to $200 billion this year from $175 billion last year. Lenders have been gearing up. WaMu, for instance, is projecting subprime originations to reach $8 billion this year and about $9 billion next year. Option One's O'Neill said that the firm has been originating approximately $1 billion per month.
Panelists gave their own reasons for the boom. William Acheson, managing director at GMAC-RFC, commented that more of RFC's clients are moving into subprime. Aside from this, subprime lending has become more efficient.
Reminiscent of the past?
Though similarities can be drawn to the 1997/1998 volume phenomenon, Henry Engelken, vice president at Moody's Investors Service, said that this is not a good comparison because originators in that era were not as well-capitalized as they are today.
During those years, issuers that have since left the market - including as Advanta Corp., AMRESCO and ContiMortgage - quickly increased their origination volume because earnings growth was based on volume growth. As a result, credit quality became secondary to volume growth.
In contrast, Engelken states in a recent report that the credit quality for recently securitized pools seems to be stable, characterized by higher FICO scores and slightly higher loan-to-value ratios.
Other panelists, such as GMAC-RFC's Acheson, noted improved underwriting consistency, which has evolved over the past several years.
Current issues discussed
Other topics included the continued consolidation in the industry, predatory lending issues and the use of lender-paid mortgage insurance.
Panelists said that consolidation in the mortgage industry going forward will not happen as rapidly as it had in the past few years. Some said that consolidation is a positive for the sector because it lends itself to improved transparency, as well as improved collateral performance. One of the panelists also noted that many smaller companies currently popping up are positioning themselves as "buy targets" rather than establishing long-term strategies as stand-alone entities.
In terms of mortgage insurance, lenders on the panel said they continually evaluate the product, and its usage depends on whether or not they could issue at desired subordination levels with the added enhancement. Some, however, argued that the use of mortgage insurance has not made a lot of economic sense as it has become more expensive now than it was in the past. Moody's Engelken noted that average subordination levels have decreased because of mortgage insurance.
The ongoing predatory-lending crackdown is apparently on the minds of the subprime lenders, who noted new legislation, such as the Georgia Fair Lending Act, appearing in the various states. The Georgia Act, which took effect last Tuesday, should set a precedent, they said, because it is the hardest to comply with among the various laws in other states.
Members of the panel talked about the possibility of purchasing a Federal Savings Bank, as Federal preemption is attractive. It's unclear what the ultimate impact will be, but they warned that the new laws could several their businesses. One panelist said his firm has stopped originating loans in West Virginia because of the anti predatory-lending law in that state.
Also noteworthy: the differences in the anti predatory-lending laws in the different states destroy a level of homogeneity of the subprime mortgage market, not to mention its ultimate effect on diversification as lenders abandon certain loan markets.