Thursday, April 15, 2010

Mortgage Experts are Asked for Industry Insight Again

Here’s one more example of why we are known as The Mortgage Experts. When industry experts need some insight, they call us.

American Banker needed some information on why so many loans fall apart at the last minute, costing lenders lots of money, so they gave us a call. Here’s an excerpt from an April 14 article by Kate Berry:

This month, Steve Abreu, the president of GMAC Inc.'s mortgage operations, warned 150 loan officers that wasting the back office's time would cost them.

He told the sales representatives at a Fort Washington, Pa., branch that from now on part of their compensation would be tied to pull-through rates — the percentage of applications that end up being converted to closed loans. GMAC wanted to cut the costs of having processors and underwriters work on loans that don't get funded. So it gave the loan officers an incentive to do better up-front screening.

"The whole reason we did this was just to lower our costs to originate and make sure our loan officers were taking good applications so we would have a better close ratio," Abreu said in an interview. "If they don't hit a certain threshold, they get dinged."

While GMAC's move is unusual, it underscores one of the industry's less-obvious problems today. Tightened underwriting guidelines have increased the risk that a loan will not make it all the way through the pipeline. Aside from the man-hours spent in the back office, lenders stand to waste money on hedging future secondary-market sales of loans that never materialize.

Chris Bennett, the president and chief executive of Vice Capital Markets, a Novi, Mich., hedging and interest rate risk management firm, said loan officers often hold out hope that a loan will be funded "even if they know the deal is dead."

"You could have a loan that is locked for 45 days and it gets extended and the lender ends up hedging the loan for 90 days and it may never be closing," Bennett said. "So lenders end up hedging what amounts to [nothing], and it's expensive."

Despite the turmoil of the past few years, lenders complain that many loan officers have not changed with the times.

"The subprime days lasted for so long and so many people got in the business when all you did was collect a Social Security number and an address and the deal miraculously closed," said Chris Thomas, the owner of Mortgage Support Services, a Westminster, Colo., lender. Today, most real estate deals fall apart at the last minute because loan officers "haven't read the guidelines," Thomas said.

Though lenders typically run loan applications through automated underwriting engines, such software may not catch tighter restrictions added by mortgage insurers, such as (lower) total debt-to-income ratios, he said. "The reason loan officers are not up to speed is that they don't know how to process a loan."

Loan officers need to do a better job of collecting data from potential borrowers, so lenders are not spending money out-of-pocket underwriting and processing loans that ultimately fail, several executives said.

"It's a different world," GMAC's Abreu said. "You really need to gather as much information as possible before you hand off the loan so you have a clearer picture of the credit profile of the borrower."

Walsh agreed. "Some loan officers really didn't learn the business," he said. "The business was always, 'Just take loans, just take loans,' and there was no ramification for high fallout."

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