There has been a lot of talk about how good mortgage credit quality has been post-downturn, but to get a better sense of how good, investors may want to consider some of the steps being taken to mitigate loan performance risk.
These measures clearly are aimed at mitigating some of the specific concerns that hurt the performance of loans produced during the housing boom, and lenders have some strong business incentives for maintaining them.
“The industry cleaned itself up…because of…repurchases and losses,” Dan Cutaia, president of capital markets and risk management at Fairway Independent Mortgage Co. noted in an interview with this publication.
“It was survivors like us who really tightened things up to avoid losses and repurchases of nonsaleables.
“The investors have all neatened everything up and the mortgage insurance companies have tightened it all up,” he said.
Among signs of this is the fact that there continue to be overlays over the standard underwriting requirements, said Cutaia.
In addition, “FICO scores have steadily risen over the past few years, subprime is no longer an outlet or a possibility, and appraisal and valuation requirements are tougher than they have ever been,” he said.
“Lenders like us are demanding tougher appraisal reports and a lot of tools and diligence done around fraud mitigation or anti-fraud measures, so there's less chance that a loan is going to get through that has misrepresentations,” said Cutaia.
Fraud risk is known for evolving in ways designed to avoid preventative measures put in place, but Cutaia indicated lenders are keeping an eye on recent trends in this area.
When asked for an example of one, he said, the company is on the lookout for “investors who are buying homes out of foreclosure and then trying to flip those quickly.
“We have a lot of overlays relative to that,” he said. “We have a lot of risk there.”
Also helping with fraud prevention today is the fact that “everything gets documented pretty thoroughly today,” he said. “People's income get analyzed properly, [including] their cash-to-close and the source of those funds.
“We do a better job of analyzing layered risk in a file,” added Cutaia. Worksheets are used to examine it, he said.
“If you look at any one thing in a file it may not be enough to reject it,” said Cutaia. “We look at a file in a holistic way because there are many, many layers of risk.”
Lenders today also “watch delinquency numbers a lot more closely,” he said.
“If we got a situation with a branch or if some originators' delinquency numbers seem to be moving up, we'll put individual overlays on.”
Currently these measures look like they are at least an improvement relative to market conditions between 2005 and 2007, and possibly over a longer span of time.
As Cutaia put it, “the current book of business that's being originated…is about as good as any book of business that has been out there in the 26 years, maybe even better, it would appear.
“We'll see three or four years from now, but currently, the quality of the loans that we're approving is much better,” he said.
