Sign Of The Times?

An interesting week for those of us who toil in the mortgage end of the real estate business. Two major national players in the sub-prime lending market closed their doors, OwnIt Mortgage and Meritage Mortgage. OwnIt is a fairly new wholesale mortgage lender but one of the fastest growing in the sub-prime market. Meritage is a little older and with a lower profile, but always testing the bottom of the risk barrel. To inform, wholesale lenders solicit business from brokers such as us, offering various programs which we match with our clients needs. When we have a match we send the application to them, they underwrite the application and if or when it matches the parameters of the program they fund the loan and it is then packaged with other loans and sold to investors. The investors provide the actual money in this whole scheme of things, and for that reason they determine what loan programs are offered and what the underwriting standards must be. Underwriting simply means risk assessment. The underwriter determines that the evaluation of the prospective borrower, as to income, credit history, employment, etc., and the value of the property being offered as collateral, fall within the guidelines established by the secondary market. Since everyone involved in this loan origination process is paid on their production, it is apparent that adherence to the standards set could have an inhibiting effect on income, compared to perhaps a looser interpretation of the rules. The secondary market people never see the homes, never talk to the borrower, never meet the appraiser and rely on the word of the wholesale underwriter to present a true picture of the risk involved in any given loan presented to them in a portfolio of loans. Street talk has it that OwnIt Mortgage is obliged to buy back over $600 million of loans that went sour, foreclosures in some cases and in many cases loans in which the first payment was never made. They can't do it, hence out of business.
The entire process of originating loans is heavily dependent on the ethics and integrity of the people involved, the originating broker (guys like me), the appraiser, the wholesale lender. If the broker is dishonest (there really isn't a kinder word for it), he'll shade the facts or conceal them, he'll hire a "flexible" appraiser one who will appraise to satisfy a real estate agent rather than an honest estimate of value, and if the underwriter is more concerned with volume of business than the integrity of the loan, then the collapse of the edifice is inevitable. All of the people who engage in these behaviors, and they are almost epidemic, use the excuse that they are simply pressing to get a client into a home. Nonsense. They do it for money, and they not only don't help a client, they put him or her at risk, destroy their credit and most likely lose the client their home. The underwriting guidelines established by the secondary investment market are the result of ongoing and exhaustive review of risk factors that affect the ability of borrowers to repay a loan. It is foolish to ignore them. No ethical practitioner will.
On a brighter note. We are seeing an increase in buyer inquiries, taking advantage, we believe, of very favorable market conditions. Interest rates continue to stay low, inventory favors the buyer, and the other stuff we keep mentioning, employment, gas prices, etc. are still plus.

Thanks for visiting.