As a result of the housing crisis, mortgage originators have been stuck with a very limited set of products to offer their clients. Nonconforming products of all kinds, whether jumbo or nonprime, were barely available.
But is that tide turning and are we moving away from plain vanilla lending? At the start of this section of our roundtable, the participants from Titan Lender Services discuss why they are creating a jumbo correspondent aggregator.
National Mortgage News invited a panel from various segments of the mortgage industry to discuss where they see the future of the business going.
Joining moderators Mark Fogarty, editorial director, and Brad Finkelstein, associate editor, were Jeff Taylor, co-founder and managing partner, Digital Risk; Dan Thoms, executive vice president, AllRegs; Bob Simpson, president, IMARC; Mary Kladde, CEO, Titan Lenders Corp.; Ruth Lee, executive vice president, Titan Lenders Corp.; Kevin Stitt, president and CEO, Gateway Mortgage; Daniel Jacobs, president, retail branching for Residential Finance Corp; Garth Graham, partner, Stratmor Group; Jennifer Creech, CEO, InHouse Inc.; and Brian Coester, CEO, Coester VMS.
FOGARTY: So the other part of a healthy business, people don’t like to hear this is the nonconforming, which obviously is going away, jumbos have gone away. Barely, this is, one guy who securitizes them, right? But when is that market going to come back?
FINKELSTEIN: As it happens, our two participants from Titan Lenders Corp. just announced they were starting a jumbo purchase business.
LEE: Yes, we’ll be buying jumbo. And I think that overall, if you look at any of those markets, one of the things that Mary said that I think is really important is consumer confidence. It’s an entirely subjective idea. It’s really predicated on a perception, rather than—and sometimes it’s based on reality and sometimes it’s not. I think that everybody was really tired of being the last rat on a sinking ship. And I mean as the market kept diving down, you didn’t want to buy a house that in three weeks was going to be worth even a half a percent less. And so if you’re looking a new house, you wanted it to be right size, I mean it’s one of your largest investments. You want to make sure that the value is there for the house that you’re buying. And even in the jumbo market, as we’re looking and there’s an enormous appetite, small banks and community banks have an enormous appetite for that in terms of portfolioing those loans and there’s a huge need. And they’re very high-quality, high-credit loans. And there’s nothing that’s going to be weird about them. I mean nobody’s interested in the interest only. You don’t even have to go there and the appetite will be there. And we see a place in the market that’s going to be there, but to your point, I mean I think consumer confidence is really going to drive the purchase market into the next couple of years. If it’s there, you’re going to see purchase business go up. If it’s not there, you’re going to see it stay around right where it is. And interest rates and all of the rest of it will support that sense, but nobody wants to buy a house that’s going to deflate in value. That investment is bad investment.
FOGARTY: Certainly the jumbos suffered from being nonconforming loans when B&C were nonconforming. But obviously it’s a total different product. So it may have an unfair tarring of the brush there.
LEE: They’re really super conforming.
STITT: My prediction on nonconforming, I don’t think the nonconforming will be here through the government agencies like Fannie and Ginnie and Freddie, but as soon as the pricing gets to a point where some private securitizations will happen, I think Redwood Trust is about the only one doing them.
FOGARTY: No, Shellpoint is doing one.
FINKELSTEIN: How low of a credit score do you see?
STITT: On nonconforming?
FINKELSTEIN: Nonconforming, yes.
STITT: Depending on LTV, I think there’s a place out there for 660, it may be down to 640, depending on a low enough LTV.
LEE: I think the nice part about that is that you don’t have to take the bad stuff. There’s really no requirement and I think that it might not be driven in the same way by a securitization market to start. It’s going to be driven by community banks who are looking for, who have an appetite for building and putting those assets on their books. And that’s going to really be kind of start the engine, prime the pump, develop a market and then eventually as they start to be able to really define performance in those loan products, in those loan pools, then they’ll be able to securitize them and push them out to the market.
THOMS: Just one more comment. We manage and review 75 investors about 3,000 products. This is down from about 12 or 13,000 six years ago. So the number of products is really still small. What’s needed is some innovation, obviously, to get to a place that there’s some new products, but to me, the one key indicator for the future is the number of products based on those investors that are out there. And today it is still very small. So to say that it’s going to come back in 2013, to me doesn’t look like that’s real. From what I’m seeing with the number—we’re down from 13,000, products to 3,000, divided by 75 investors, and most of those are just regular products with just some kind of small little overlay and it becomes a new product, so…
TAYLOR: Until the private markets know what the rules of the game are, they’re going to stay on the outside. It’s as simple as that. It’s not more complicated than that. Until we understand what the regulations are, what the rules are, if they can invest by what they can expect, there is no timeframe. So this way we can get it right in D.C.
STITT: Right. And also the margins are so well, everybody is fat with business, the margins are good, why invest another 5% of your capital to hold a private securitization when you can deliver Fannie’s all day long? That’s all the sales force, it’s all more risk driven right now, versus loan officer driven.
FOGARTY: Is that a good thing though? I mean when I started in the business many years ago, IT looks exactly the same as it is now. You had Fannie, Freddie, Ginnie and a couple of hard money lenders. And we’ve sort of come full circle back to that. But is that a good thing? I mean it’s a safe thing, but is it a good thing?
THOMS: Well, so you use the word safe, which is interesting because I was going to say a moment ago that when I heard the word innovation, everyone’s fearful of innovation because we haven’t even determined what a safe agency loan is going to look like and what the safe harbor is with an agency loan at this point. So if we can’t figure out what a safe vanilla loan is we’re sure as hell not going to go take a bite of rocky road.
JACOBS: And it goes back to confidence also. I don’t want to backtrack too much, but to go back to a comment that you made earlier, about consumer confidence with jobs, I actually don’t believe that we actually have to have job growth to see the purchase market rebound. I think we just have to have a sustained period of time where people who have jobs have confidence that they’re not going to lose their jobs. So the status quo actually will help us. It doesn’t help the economy particularly, it’s not really good for our country overall, but the housing market could rebound with the status quo. It’s the fear of losing jobs and the fear of home prices declining that is keeping a whole portion of a generation from becoming homebuyers. They are qualified now, but they’re not quite ready. They have seen what their parents have gone through and what their older siblings have gone through and they are holding out until there’s a lot more certainty.
CREECH: I’ve listened to quite a few economists speak and they were doing surveys on younger people in their 20s or 30s about buying properties and now they don’t look at buying a property as an investment. They look at it as something that they have to be willing to live in for 10 to 20 years. And if that’s the case, they want to be secure about the value. We have a pretty transient society and people move from state to state, and they’re at risk of losing a good portion of their asset or their savings if they’ve just acquired a property. So all the data I’ve seen is that we have maybe six months of pretty good story and then there’s going to be some pushback. And as rates go up, I mean at some point rates are going to go up and we’re going to have inflation. We have a potential inflation bubble and we have a dollar bubble and how does that affect the outlook for the consumer? And that limits what they’re willing to do. So everything I’ve read says that our economy should turn around in 2016 or 2017, which when the economy turns around, then you see more transactions in the real estate community.
SIMPSON: Underpinning this whole conversation is interest rates are reflective of risk. So we’re talking about borrowers feeling risk, we’re talking about investors feeling risk. There’s plenty of private money at 12%, but there’s not a buyer to take it.
(Second of two parts.)