It’s no secret that high volume refinancing is dead—at least for now. To some degree, it feels as though we’ve been living in an incredibly protracted refinance cycle (when we weren’t in the death spiral of 2007 – 2011, of course).
But those who have been around the block a time or two in mortgage lending know that the onset of a purchase cycle means that some things need to be done differently to succeed. Product mix will be a big ingredient. Believe it or not, in spite of increasing regulatory pressure, there may well still be ways to be creative.
We know that many lenders and banks have thrown their resources into retail products, while others are more focused than ever on (or just getting themselves established in) correspondent lending. But what products are they seeking to sell? How creative can a lender be today in this environment of regulatory scrutiny? The answer, it seems, could possibly be found in the approach taken by lenders in years gone by. And it would seem that ingenuity could take its cue from the strategies of the past.
Years ago, before “securitization” became a household word, large non-bank originators would sell their loans to various thrifts, finance and insurance companies around the country. The Money Store, for example, had a large department of trained secondary marketing people who would sell their loan holdings to hundreds of these investors on a constant basis. The model worked very well for them.
I read recently that Shellpoint Partners, lead by Lewis Ranieri, had pulled a scheduled bond offering from the market backed by jumbo loans which were originated by a major lender. Shellpoint announced that it would be selling its loans outright to another financial institution because, quite simply, the return was better. Could this be an indication that non-agency securitizations are going away, or at least, receding, because of the existence of a more advantageous alternative? It seems logical because of the yield hungry nature of the market coupled with the overriding fear of securitizations gone bad.
Perhaps, to some degree, going back to the old Money Store model might be an indication of new profitable opportunities for larger loan originators.
There are insured mortgage products that community banks and other thrifts of various sizes can originate that are insured up to $250,000 on those open end lines of credit mortgages as well as second mortgages. This means that a bank can issue up to a 100% LTV purchase jumbo mortgage. The interest rates on these loans can be priced much higher than garden variety home equity loans and second mortgages. Although the fear factor stops many thrifts from offering these products, the truth is that, in many ways, they can be much safer than garden variety loans. Of course, non-traditionally securitized products will likely be subjected to a greater amount of investor scrutiny. But, to be honest, if a lender has not yet taken to heart that compliance and due diligence are the new name of the game, that lender may not be long for this world anyway.
There is any number of products that will likely find demand in the coming months or even years. Although it’s very premature to assume that the interest rates will only go up and up, it seems likely that we won’t be pegged at the historic lows to which some have become accustomed. In addition to the most obvious products: home equity lines and all varieties of jumbo purchase loans. In fact, keep an eye out for the market on other products such as super jumbo mortgages up to $5 million. The VA IRRRLS loan, done according to the book and with no overlays, could make quite a bit of sense in a number of scenarios. Don’t forget about the reverse mortgage. Although this product has the attention of regulators, it can be a profitable product if done by the book and with adequate attention to finding appropriate customers. I’ve heard it suggested that other products may find a place in this brave, new market, including all varieties of cash-out products, mortgages for new Americans or even non-resident Americans, higher CLTV HELOCs and, yes, even some non-conforming credit, low LTV purchase or re-fi products.
The fact is that the end of a re-fi cycle is only the end for a lender or originator unwilling to adapt to the changing market. In many ways, we are finally seeing a “normalization” of our once cyclical industry. The wild card is, without question, the changing regulatory tide. Loans will indeed be more costly to originate. But the ingredients are in place for diligent and forward-thinking businesses to win market share and remain (or become) successful.
