Execs Offer Subprime Defense Mechanisms

Article excerpt

MIAMI -- A CitiFinancial Mortgage executive advised other subprime lenders to focus on "defense" as much as "offense" and noted that nine of the industry's top ten players from 1997 are no longer around.

In his keynote address last week at a subprime lending conference here, Richard Kile said an explosion of interest-only loans, other risky underwriting practices, and a heavy reliance on California originations are just a few of the reasons for lenders to ask themselves, "Am I doing everything I need to do to have a business that lasts?"

Mr. Kile, the Citigroup Inc. unit's executive vice president of mortgage banking, warned that reputation risk is "a far larger risk than monetary damage, fraud, or regulatory penalties."

One of his main suggestions was to get involved in the National Home Equity Mortgage Association's BorrowerSmart education campaign, which is sponsored by several lenders, including Accredited Home Lenders Inc., Countrywide Financial Corp., Saxon Capital Corp., HSBC Holdings PLC, and New Century Financial Corp.

Besides helping borrowers make educated loan choices, the campaign is "the first significant thing the industry has done as a whole to be proactive" in response to "charges of persistent predatory lending," he said.

When making forecasts, "I think as an industry we need to do a better job" of keeping an eye on factors that might lead to weaker home prices or higher interest rates, Mr. Kile said.

He also advised subprime lenders to make sure they have "the right people with the right job descriptions" in each department. "It's not good to have somebody good at sales and marketing run your risk department. It happens, people, too many times."

Mr. Kile suggested debt-to-income ratio ceilings of 55% for no- or low-down-payment subprime loans with a fixed rate and 50% for those with an adjustable rate. He also urged originators to pay attention to "reasonableness" tests required by investors on stated-income loans.

SourceMedia Inc., the parent company of American Banker, organized the conference.

Tom Benz, a senior vice president at HSBC Bank and the head of asset risk management for mortgage- and asset-backed securities, said assessing reasonableness means looking at whether a borrower can carry a certain debt load. He cited the case of a loan applicant who claims to have enough income to support a $3,000 monthly payment but most recently was spending only $700 a month and has no assets in the bank. …