Payment Options

When Washington Mutual reiterated its commitment to focus on home-equity, alt-A and payment-option loan products recently, the move highlighted a growing trend in the loan origination business that will have long-term consequences for loan servicing.

It's not just "B&C lenders" that are expanding further down the credit spectrum these days. The nation's largest conventional lenders - and often the largest loan servicers as well - also are making more pronounced forays into the business of servicing customers who may not qualify for a traditional, A-credit conforming loan product.

Countrywide, for instance, is the nation's largest payment-option lender. Citigroup has combined its prime mortgage lending operation with its nonprime unit, formerly known as CitiFinancial. Just about everybody is looking for ways to emphasize higher margin loan products than the traditional conforming loans sold to Fannie Mae and Freddie Mac.

Nonconforming loans are nonconforming for a reason, of course. In all likelihood, these loan products will have higher delinquency and default rates in the long-term than a plain vanilla, conforming loan. The new loans, with resetting payments on adjustable-rate products and payment-options for borrowers to consider, will force lenders to rethink how these loans should be serviced to minimized defaults and losses. Countrywide recently took a step in the right direction. After finding that the vast majority of borrowers are choosing the payment option with the lowest monthly bill, Countrywide sent letters to payment option borrowers explaining the ramifications of this decision. It might be an eye-opener for some borrowers to find out how much the monthly payment could rise if the loans were to reset today. Countrywide, which has sent out some eight million of these letters, hopes that the news will encourage borrowers to think carefully about their options and not forsake their ability to pay tomorrow just to get the lowest possible payment today.

Countrywide's move is a smart one, and we hope other servicers also are thinking about ways to prod their customers to act responsibly with these unusual loans. Servicers should follow Countrywide's lead and think about taking proactive action to keep consumers informed about the risks they face. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com