Executive Conversations is a HousingWire web series that profiles powerful people in the financial industry, highlighting the operations and the people that make this sector tick. In the latest installment, we sit down with Daniel Perl, chief executive officer of Citadel Servicing Corp., to discuss how his company is changing the narrative on non-prime loans. 

Q. What is driving the recent surge of interest in non-prime lending?

cscA. Quite simply a need from loan originators to earn commissions and mortgage companies to improve their profits. They have spent the past five to seven years picking off the low-hanging “refi fruit.” 

The market for agency or jumbo refinances has gone the way of the buffalo with rising rates and it might be several years if that trend continues for any meaningful volume in the refinance sector to re-emerge. 

Non-prime offers a viable alternative to penetrate a market that has been insufficiently mined for the past 10 years. Additionally, it is a loan product that has not become a commodity so there is room to gain market recognition in addition to the profit motive.

Q. When did you foresee this market coming back?

A. The short answer is when I realized the importance of the 2010 Dodd-Frank Act. In reading the 800 or so pages that pertained to the mortgage lending sector, it became quite apparent that a re-ignition of the finance company mortgage model could be triggered as the act provided a ready road map for compliance. 

I am proud to say that we were the first back in the space with a compliant lending program — and this statement has been validated by the numerous interviews in publications from New York to Los Angeles (not to mention London to Tokyo) since late 2011. 

As the person who rebadged “subprime” into “non-prime” in order to create a less pejorative moniker, Citadel Servicing Corporation (CSC) has been at the forefront of the movement to expand rational lending products to an underserved market.

Q. How did you prepare CSC for this moment?

A. That, ironically, was the easiest part of re-opening this particular lending market. As a long-term servicer of loans, CSC made an easy segue from an acquirer of NPL and RPL assets from 2007 to 2011 to one originating the new edition non-prime loans circa 2011. The hardest part was convincing brokers, bankers, and borrowers that this was not a mirage. 

Most of the companies and borrowers that we approached were concerned that CSC was just a new breed of “hard money” lender. Explaining to both groups that we offered full 30-year term Dodd-Frank compliant mortgages was arduous to say the least. And with no competition for over 18 months the personnel of CSC felt, I am sure, like a zebra in a herd of horses. There were simply no other originators in the space until late 2013.

Q. How do your non-prime products differ from the typical non-prime loans of the past?

A. It is night and day; and as a non-participant in such oddball lending programs as the “pick-a-pay” and other sketchy schemes of the era 1990 to 2007, this marketplace is a return to the finance company style lending I grew up on in the 1980s. The key issues are always about loan performance and ultimately loan repayment, not to mention avoiding the layering of onerous risk to a mortgage resulting in delinquency. 

The trend away from the previous era of 2- or 3-year fixed initial ARM terms with built in six-month jumps in payment bolstered by sequential prepayment lockouts was a surefire way to create borrower distress.

In the not-so-distant past, finance companies like Beneficial, Household, Associates, and Dial among others played a specific role in providing access to financing for all manner of American citizens who were locked out of buying or owning real estate for a number of reasons. 

I am, however, under no illusions that some of the positive factors of the past seven years might be co-opted by competition pushing the boundaries of common sense. It surfaced in the 80s, 90s, and most direly in the 2000s. It is not a wildly pessimistic guess to think it could not happen again. Competition is often the impetus to creating poorly designed risk laddered lending programs.

Q. How are your non-prime loans performing?

A. In a word, fantastic! And since we are one of the very few to directly service all of our non-prime loan products in-house, we are in the enviable position to have the data immediately available to back up this statement. For the past seven years delinquency has been under 3.5% from 30 days through REO. 

And speaking of REO, we are fortunate to have had only four since 2011. Delinquency from a roll rate perspective has effectively been stationery in the various “buckets,” which is remarkable given that our servicing portfolio will be cresting $2 billion shortly and we have originated almost $3 billion in the same period. 

I have never seen anything to rival these metrics in over 35 years of originating and servicing mortgages. The two leading drivers of this is sound lending programs and full vertical seamless integration.