Mortgage lenders moving forward in today’s post-downturn environment are increasingly either aiming to become bigger or join bigger players while at the same time keeping a tight lid on their risk. In doing so, they exemplify the line the market needs to walk between the push for growth and the need to continue avoiding undue credit exposure.
New York-based US Mortgage Corp. president Steven Milner, for example, heads a once-somewhat regional lender currently licensed in 24 states and growing with the aim of being in 40 states by the end of 2012. The company also is working on agency and Ginnie Mae approval.
But as one of the veteran but often smaller lenders who have said they survived the downturn by sticking to their knitting credit-wise and never funding subprime loans, Milner also wants to make sure his company continues to avoid credit issues as it grows.
Underwriting today is said to be pretty tight on a historical basis, but even with the market largely dominated by government or government-related entities, Milner can point to credit concerns he seeks to avoid. Relatively low credit scores are still allowed in some government programs, he said. When asked about an increased downpayment requirement aimed at offsetting such a score, Milner noted that “gifts” might be part of such downpayments and could still affect borrowers’ “skin in the game.”
The line that lenders are trying to walk in this regard has many parallels in both the public and private mortgage market today.
With the downpayment historically a key barrier to borrowers’ ability to buy a home, MIs seem like a natural bridge serving what are often otherwise somewhat conflicting needs of home and loan buyers.
“We’re aligned with the consumer because we’re helping that consumer get into a home sooner than they would if they had to have a much more significant downpayment. We want that borrower to have some equity in the home so that they’re in alignment with us but then we want that borrower to stay in that home for the life of the loan until they’re ready to pay it off,” Kevin Schneider, Genworth’s president of its U.S. mortgage insurance business, told this publication.
“On the other side of that...we’re very aligned with the ultimate investor who buys that loan because we like them [want to] keep that borrower in the loan.
“We really bring some discipline to the mortgage origination process for the loans that we insure because when we insure them we’re putting our own private capital at risk and we have to pay in a first-loss position if the borrower ultimately fails,” he said.
MIs like most market participants clearly suffered strain during the downturn but have, with at least one exception, continued to operate. So the question is whether they as well as lenders have learned enough to walk the line in their underwriting.
“Low downpayment lending can be done very responsibly particularly when it has private mortgage insurance involved with it to make sure that you’re getting a second look at the underwriting of those loans,” Schneider asserted.
When asked about ways mortgage insurers mitigate the downpayment risk they take on, Schneider said knowing and accurately documenting income and asset levels is part of the process.
A recent Genworth study of housing trends in eight countries suggests in most cases borrowers’ income levels support their ability and willingness to repay their mortgages the U.S. market given that “just” 18% of American homebuyers using 50% of their income to repay their home loans.
When asked if 50% is the level at which home payments become problematic, Schneider said, “What I would say is those borrowers probably need to ratchet down the size of the house they’re interested in buying.”
When asked about mortgage insurers view of appropriate borrower debt levels, Schneider said as an mortgage insurer, Genworth is really focusing on the “back-end ratio” and consumers’ total debt beyond their mortgages, noting that the market is still recovering from back-end debt ratios that in too many cases were so high it was just impossible for borrowers to maintain their mortgages. Pinning down a universally appropriate debt level is a challenge, particularly from country-to-country, because among other thing cultural attitudes toward debt vary, Genworth’s recent study suggests.
“I can’t speak to the vagaries of different geographies and what’s in consumers mindset...in those other places but there’s a certain level [where if the borrower is] overlevered, it doesn’t make sense for us to provide mortgage insurance coverage,” he said.
According to the study, Genworth research partner RFI found while Americans’ mean percentage of after-tax income spent servicing all debts at 42% is relatively higher than the eight-country average of 38%, the percentage of Americans who reportedly had trouble repaying their mortgages, at 21%, is slightly lower compared to the eight-country average of 22%.
The seven other countries in the study were Australia, Canada, India, Ireland, Italy, Mexico and the United Kingdom.
