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MI Executive Sees 'Reverse Migration' of Loans

The current situation in the subprime mortgage business is the "greatest reverse migration" of mortgage loans from the investor back to the originator, the chief executive of Radian Guaranty told the Regional Conference of Mortgage Bankers Associations here.

S.A. Ibrahim continued these loans required "payments that never made sense in the first place" from borrowers. Wall Street is spooked by rising delinquencies and is forcing lenders to repurchase loans while the lenders still have the ability to do so.

People should have seen this coming because credit and housing cycle downturns are not new. But the secondary market is full of new players that are not familiar with the cycles, he said.

This is because the government-sponsored enterprises and the mortgage insurers have the "disadvantage" of remembering past cycles and have put those lessons into their pricing. They were replaced by those newer players.

Mr. Ibrahim, a one-time member of Fair Isaac's advisory board, said because of that experience, he became aware that a 680 borrower could behave like a 640 or a 720. So relying only on the credit score in underwriting a loan isn't good.

He recalled when he worked for GreenPoint Mortgage that company came up with a broker score. Lenders can't be in the business of doing alternative loans, he said, without looking at where their loans are coming from.

Another lesson from his time at GreenPoint involved investors. At first investors asked plenty of questions about the quality of its loans. As time went on, it got fewer questions. Eventually, the guidelines of the investors went beyond where GreenPoint was.

Mr. Ibrahim said that he was bullish on the future of the mortgage business. While there will be some short-term pain, the best days are ahead, not behind.

Angelo Mozilo, the chairman and chief executive of Countrywide Financial Corp., Calabasas, Calif., addressed the meeting through a pre-taped segment. He noted that a 19% delinquency rate meant that 81% of borrowers were still paying their loans and it is important to keep that in perspective.

As for loan suitability, Mr. Mozilo said this is something that is not driven by metrics. People have different lifestyles and it is up to the individual to determine what is suitable. It is not up to the industry to determine who owns a home.

There was pressure by consumer advocates and regulators to widen guidelines. Now many of those advocates are critical of such efforts including stated-income loans.

He said Freddie Mac and Fannie Mae provide stability when things get tough in the marketplace and they are an anchor for the industry.

His advice to survive the downturn "is no secret." Mortgage bankers need to "pay attention to everything you are doing. If you believe in your industry, don't give up."

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