Magazine article Mortgage Banking

Secondary Market Is Less of a Gamble with Technology

Magazine article Mortgage Banking

Secondary Market Is Less of a Gamble with Technology

Article excerpt

THE CURRENT INSTABILITY IN THE operations of government-sponsored enterprises (GSEs) continues to nudge the secondary mortgage market to depend more on technology for its survival. This new dependence further validates the notion of technology identifying the types of loans in potential loan-pool purchases so buyers and sellers can make accurate and profitable decisions.

Even though forecasts indicate only modest budget increases for technology, lenders must rely on this innovation to remain competitive.

In the meantime, GSEs are expanding further into the nonprime market, causing additional pressure on lenders and buyers in the secondary market to remain profitable. Cutting-edge, affordable technology for loan evaluation, while increasing loan production with minimal manpower, can safeguard the nonprime secondary market.

The nonprime share of the market, which held steady in the barely noticed 7 percent to 8 percent range in more recent years, climbed the charts last year to more than 20 percent. We may see this share easily surpass 25 percent this year.

The nonprime story, although impressive, has put pressure on the GSEs to find ways to expand their definition of the prime market, thus expanding their market share.

We believe this will change once a newly created Federal Housing Finance Agency (FHFA) is established by GSE reform legislation and the entity begins to define the loan types eligible for GSE purchase. Once the GSEs clearly define those loans, nonprime loan sale parameters will shift again.

In this new, "designer-loan" era, borrowers have their own custom-fit loan terms, allowing many with less-than-perfect credit to obtain affordable financing for a home. The disparate, alternative products make loan-quality assessment more important than ever.

As a result, the secondary market can no longer rely on assumptions about the kinds of mortgages and loan terms in the pools they buy and sell.

Looking ahead, lenders expect their technology budgets to increase by only 5 percent--a foolishly low number in my view, given the benefits and profits that would be reaped from technology. Technology provides a cost-effective means for evaluating the mix and quality of loans being considered for purchase. Provide any prime or nonprime secondary player with technology to evaluate loan pools quickly, and you'll see limited risk and ensured profitability.

Technology and the trading desk

Bidding, purchasing and paying premiums for pools considered nonprime can often result in overpayment or underpayment if the anticipated risk is inaccurate. Originating lenders may experience repercussions, having their reputations and profitability affected adversely.

We recently saw a pool of nonprime loans valued at better than $2 billion with 75 percent of it not meeting the originating lender's initial underwriting guidelines and requiring a subsequent review. Imagine, if all loan amounts were equal, that 75 percent could amount to $1.5 billion in potentially unsellable loans.

According to the guidelines set by the pool buyer, this same pool had a more than 10 percent rejection rate, while only 18 percent of the pool was approved. …

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