How far can lenders push the credit box?

Watt announcement helps, but risk keeps standards tight

A panel of lenders discussing opportunities in the purchase market at the MBA Annual Convention Tuesday was cautiously optimistic, noting that while progress has been made, more clarifications are needed for a significant increase in non-QM lending.

The panel, made up of Lisa Ledbetter, partner at Jones Day, David Battany, executive vice president of PennyMac, Mitchell Hochberg, partner and general counsel for Fenway Summer, and David Steckel, product and pricing executive at Bank of America Home Loans, addressed consumer education, non-QM loans and the challenge of attracting first-time buyers.

Ledbetter, who was former vice president and deputy general counsel for Freddie Mac, applauded the statements made Monday by Federal Housing Finance Agency Director Mel Watt that clarifed the repurchase risk lenders face.

"I view his remarks as positive and think they create more certainty around the risk that a lender takes on when they make a loan, and will help in expanding access to credit," Ledbetter said.

Hochberg said Fenway Summer is launching non-QM 5/1 interest-only products for "super-prime" borrowers who are not getting non-QM loans today. "These are for borrowers with really pristine credit quality," he said. "Interest-only products make sense for the right type of borrower, and there's a lot of opportunity beyond the 43% debt-to-income ratio."

Bank of America has been focusing on consumer education, reaching out to its current consumers to educate them on what products are available, and how they can position themselves to get a mortgage, according to Steckel.

"Our goal is to try to capture more activity from our existing customers," Steckel said. "We are inserting ourselves into the process with our customers to help them understand what it takes to apply successfully with us."

Some of the topics the lenders covered:

Who's being left out of the purchase market today?

Battany: “Buyers with less than pristine credit. Today's average credit profile is 760 to 770, compared to 720 five years ago.”

Is the 760 credit score the new normal or just transitional?

Ledbetter: "I think we're in a transitional period. Most of you are acutely aware that the biggest headache you have is regulatory risk and uncertainty around that. There have been dozens of regulations that are new that need to be integrated into businesses — some just announced yesterday — and for each of them, they are affecting every part of the mortgage process, from origination to servicing to securitization. Things are unsettled right now, so it is going to take a little bit of time to come to a new normal."

How do you expand the credit box?

Hochberg: "Underwriting standards have tightened and lenders are chasing the most credit-worthy customers. The box can grow, but it’s not going to be growing to the outer limits.”

On the effect of the changes in representations and warranties and risk sharing announced by Watt this week

Ledbetter: "(Watt’s comments) diminished the repurchase risk that has been an overhang in the market for some time. It has been uncertain what loans would be repurchased. In private practice, I’ve seen situations where the GSEs were demanding a buyback for very technical violations of reps and warranties. What was meaningful from Director Watt’s comments Monday was the significance standard, where lenders wouldn’t see buybacks in terms of minor technical violations, or there wouldn’t be a buyback on a single loan that didn’t meet the guidelines. And there were a number of areas that still have to change that he highlighted in a general way.”

On the dearth of non-agency products

Battany: “There’s a strong mismatch today in the credit risk pricing of GSE loans compared to the private market. Clearly, the pricing relative to the risk is very rich.“

Hochberg: “How much do you stretch to get AAA buyers?”

Steckel: “The rigid protocols and standards are so tight that you put the customer through a bind to make it happen.”

On macroeconomic factors

Steckel: There’s no silver bullet that will change all this. Wage growth and economic stability need to come together.”

Hochberg: “Homebuilding is still way down. There are markets throughout the country where there are numerous offers on every house. People who are out there looking to enter the market are constrained by lack of supply.”

Battany: “A lot of younger borrowers witnessed friends and family who went through a lot of stress in the financial crisis. I think lack of confidence in employment is as much a driver as access to credit.”

Ledbetter: “I can’t emphasize how important it is to show borrowers the value of buying a home. From a macro perspective, educating people to be in a position to be homeowners a year from now is a structural shift.”

With QM and ATR rules, what needs to be changed to open the credit spigot?

Hochberg: “I don’t necessarily know that I want that many changes to that rule. Please, stop changing all the rules — I got enough! On things like the DTI cure, I can’t imagine how you cure the DTI other than paying back their obligations. At some point, we just have to get comfortable with the rules as they are set up. We need to provide some space and leniency in the market, but also get people to understand what risks they’re taking on and operate within that paradigm.”

Is the loan origination compensation rule affecting what’s happening in the purchase market?

Ledbetter: “That’s one of the rules that’s created a minefield of interpretations. Are companies going to be able to attract and retain highly qualified loan officers? There is more competition out there now for good, highly qualified loan originators.”

How will down payment requirements affect volume?

Battany: “Making a down payment is a hurdle to borrowers in higher-cost areas, especially where there’s still an issue with entry-level homes. But there is a strong correlation between down payments to mortgage default. The risk of default almost doubles with every 1%.”

What does the future look like?

Ledbetter: “Once the regulatory dust settles and some of the litigation is finalized, we’re going to see a different market. There are leaders in the non-QM space, fast followers and slow followers — but everyone will get there eventually. Regulatory certainty will help.”

Steckel: “We will see sustained progress. A year from now we will be in a better place than we are today, but it’s not going to be a quantum leap around the corner. It’s going to take a year to get where we want to be, changing consumer behavior and the regulatory reform. And it will be even better two or three years after that.”

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