Refi Bust Has a Dark Side

With interest rates expected to rise next year (bearing in mind that this was the consensus expectation at the end of 2001 and 2002 as well), servicing managers are pleased to anticipate that portfolio churning and writedowns may be coming to an end.

But rising rates can also cause a few problems for the lending industry. And some of the challenges that will hit the loan production side of the business may trickle down into the servicing shop.

With refinancing likely to taper off, a casualty of burnout if nothing else, an increasing number of lenders are thinking about expanding into nontraditional products.

Home equity lines of credit, alternative-A loans, B&C credit quality loans, adjustable-rate products and hybrid loans are among the items that are looking to play a larger role in the origination arsenal.

So what does that mean for servicers? For one thing, it means they may have to learn how to administer some new product types. Many of the lenders that are considering expansion into nontraditional products are conventional, conforming loan specialists. That means the channels that feed loans into your servicing shop may be serving you some unfamiliar looking products in the near future.

And as nontraditional products become an expanding piece of the loan origination market, demand for servicers that are skilled in managing those assets will grow as well. That means it may behoove lenders to add expertise in those areas today.

The Mortgage Bankers Association of America projects that loan origination volume next year will be half of this year's total. And a decline that sharp and that quick is going to do more than just push loan originators into new product offerings. Brokers, correspondents and retail originators will also be tempted to loosen underwriting standards, making more exceptions to rules that for the most part prevailed during the busy refinancing years.

Those exceptions may come back to haunt the industry in the form of higher delinquency, foreclosure and bankruptcy rates. The last time rates rose significantly, in 2000, underwriting vigilance apparently took a hit. That book of loans has performed worse than previous vintages.

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