San francisco - At the Mortgage Bankers Association's National Secondary Market Conference 2005 held here last week, conference participants focused on the influx of new products as well as the changing mortgage market dynamics. Although the jury is still out on whether these changes are beneficial, especially considering the longer-term credit implications, panelists at different sessions agreed that one positive effect is these products increase homeownership, specifically to younger and immigrant population segments.
In her speech at the opening general session, MBA Chairwoman-elect Regina Lowrie noted that the private label market "has increased 15 fold since the 1980's," adding that IO ARMs represent a larger part of the non-conforming market versus fixed-rate loans across sectors. "It means that more borrowers of all types can get more kinds of mortgages," Lowrie said. Although crediting lenders for expanding the products base, she warned that, "The growth in the types of mortgages also means increased risk."
In a panel titled Ten Years of Change, Jon Voigtman, managing director of principal finance at HSBC Securities said that in ABS home-equities, 97% of the market is floating-rate, also noting the increased securitization rate in Libor floaters. "One-month floaters is really what the market is here and overseas," Voigtman said. He added that the demand for these floaters is helping facilitate ARM market growth.
MBA Chief Economist Douglas Duncan noted that ARMs now comprise 35% of mortgage originations, the higher share, he said, is typical of a rising rate environment, citing the 1994 and 1999 post-refinance boom periods. Duncan noted that the difference this time around is that long end of the yield curve only rose half as far versus the two previous cycles and the spread between the long and short end of the yield curve is only half as wide as well, adding that this might be a sign that people are moving into ARMs as a financial management strategy.
In the third general session called Industry Leaders Perspective, panelists focused on the credit implications of these new products while acknowledging that through them, mortgage originators are able to target new homeowners who they previously couldn't - with some lenders now having as many as 100 different product offerings. The panelists also debated whether lenders should be responsible for determining the borrower's suitability to the product or should they be giving more credit to increasing borrower sophistication. Risk is also coming from all fronts and some panelists noted the additional training needed on the lender's end to understand all these new products, adding that these risks are no longer linear but are now exponential. John Robbins, MBA vice chairman and American Mortgage Network CEO said that products such as IO loans and Alt-As are relatively new. "We need a period of time to fine tune the underwriting behind that," he said.
S.A. Ibrahim, outgoing CEO of GreenPoint Mortgage Funding, said that at GreenPoint product idea meetings would be held every Friday and participants, including investors and sales representatives, would be coming up with at least 18 new product ideas for each session. He noted that investor demand for these products is being met by new borrower requirements that lenders cater to. He said that the industry is now "pushing the envelope," and acknowledged that these products are here to stay and "the end result is you have more homeowners."
AmeriQuest Mortgage Senior Executive Vice President Adam Bass said that the variety of mortgage products currently available is "amazing." However, he stated that, "Certainly there is added risk every time you push the envelope." Bass noted that the market should not embrace all of these as innovation especially since there is no indication of actual performance yet. Although all is well thus far and consumers have not complained yet, Bass said that, "the complaints are going to happen when rates move up."
Panelists also noted that increased competition is starting to push rates lower thus causing originators to take in merely half the profit margin they used to make. This has also made it harder for smaller players to compete as they are being "squeezed out." With conforming product spreads narrowing, more and more lenders are offering higher-risk but more profitable mortgages. American Mortgage's Robbins said, "Today a subprime product is just another mortgage product."
GreenPoint's Ibrahim said that there is indeed "pressure on the margin," then asked, currently "who isn't in the Alt-A business?" He said that even prime lenders are now getting into this business because of the higher margins. Ibrahim added that lenders could fight the squeeze through innovation and technology.
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