Loan quality has been historically strong since the downturn, but it could be peaking.
There are anecdotal signs that loan quality has been loosening slightly. Some say that since it has been so historically tight, that may not be a bad thing, but it could indicate the peak is nearing.
“The loosening is certainly not extreme,” said Rob Withers, vice president, product development, at product and pricing engine LoanSifter, in an interview. Specifically, credit score requirements, he said, are “starting to drop a little bit.
“Investors have been incredibly cautious, maybe rightfully so, and imposed stricter requirements on borrowers,” he said, noting that in that context, “It's not that dangerous to [loosen standards] to a point.
“I don't think we're all that far off from striking the right balance,” he said, noting that since the downturn a combination of data accuracy, operational measures that ensure completeness of loan data and improved risk management, as well as a desire to lend only to the most pristine borrowers, have all been improving credit quality.
These may continue offset a slight loosening in other areas.
Withers said a Lender Processing Services report earlier this year that indicates 2010 and 2011 were optimal years for loan quality suggests that the conditions required to produce it needed some time to develop since the bust that all but shut the market down in the wake of the 2005-2007 boom.
“The LPS report didn't surprise me at all,” he said. “It takes awhile for an industry to react to something like that.”
Dan Cutaia, president of capital markets and risk management at Fairway Independent Mortgage, said in an interview that the pendulum to an extent “swung the other way” after too-loose underwriting caused the downturn.
He agrees that credit scores have seen a relative rise but said subprime is still out of the question.
Cutaia said his company is still keeping a close eye on the other elements of “layered” risk that caused problems in 2005-2007 originations as well, such as overall borrower debt-loads outside of mortgage debt, house flipping that could be an indication of fraud, and appraisal quality.
Then, of course, there is what some see as the recent surfeit of regulation and is still increasing.
Withers said he believes the “general guidance” for this “has had a positive influence on both lenders and technology vendors,” although he hesitantly adds that there may also be within it some situations where “good intentions misfired.”
Lenders are still routinely griping about continuing mixed signals from government efforts.
They are encouraged to lift credit standards, for example, to meet the terms of the so-called 2.0 version of the Home Affordable Refinance Program to “rescue” troubled borrowers who got loans during the problematic boom years, while being discouraged from taking on more risk by other regulations.
As a result, lenders are still adding “overlays” to programs like the 2.0 version of the Home Affordable Refinance Program or Federal Housing Administration lending, and not originating loans to the extent they allow, although with the 2.0 version of HARP the government-sponsored enterprises have said they will limit liability for lenders.
Gus Altuzarra, chief executive officer of distressed loan buyer Vertical Capital Markets Group, said the state of the secondary market has had some bearing on this trend and will play a role in whether it continues.
“In today's environment, we don't have a secondary market like we had.
“So if a loan is going to be FHA insured or sold to the [government sponsored enterprises] and at the time of the sale it doesn't pan out, there aren't too many places to go other than a group like ours [that will buy it at a discount] as a result of the secondary market being as limited as it is today,” he said.
