'Third Wave' Augers Challenge

The mortgage market is changing, and that could pose challenges for companies that service home loans.

The nonprime mortgage industry has evolved and changed dramatically in recent years, with one leading executive predicting at a recent SourceMedia Subprime Lending Symposium that the subprime sector is poised for another shakeout. Brad Bradley, chief executive at Senderra Funding, said that stiff price competition is weeding out some competitors. To succeed in the business now, lenders need to keep a close eye on costs.

And data from SourceMedia's mortgage database group suggest lenders are also coping with the competitive environment by expanding their product line up, originating more "exotic" loans than ever before. Alt-A lending was up 81% late last year from the year before. Interest-only loans accounted for 25% of the market in the fourth quarter of last year.

The MBA, which tracks quarterly delinquencies, so far has not seen any alarming increase in overdue rates. But with subprime lenders accounting for an increasing share of the total mortgage market, MBA chief economist Doug Duncan has advised that the market will likely see upward pressure on overdue rates in the coming quarters. High gas prices and rising interest rates also pose financial challenges for homeowners, especially those with adjustable rate home loans. There is considerable concern about "payment shock" as rates adjust upward on ARMs, hybrid ARMs and interest-only loans that adjust to amortizing loans at market interest rates.

While ARMs, hybrids and interest-only loans still account for a fairly small portion of the outstanding mortgage market, their share of the origination space is increasing. And that means increasing demand for servicing specialists that can handle these types of products and the challenges that are unique to them. Looking for a growth opportunity in loan administration? We suggest being prepared to be one of the companies that investors and originators turn to when they need expertise in servicing non-traditional products. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com