Magazine article Mortgage Banking

Encouraging Growth and Exercising

Magazine article Mortgage Banking

Encouraging Growth and Exercising

Article excerpt

Despite nearly two years of public and private efforts to improve mortgage market conditions, "underwriting deficiencies are on the rise," reports Connie Ferran, vice president of customer credit management for Freddie Mac, McLean, Virginia. Speaking at the California Mortgage Bankers Association's (CMBA's) Annual Western Secondary Market Conference in San Francisco in July, Ferran said these underwriting deficiencies are on the rise "due to repurchase-risk increases."

She maintained, "There are a lot of issues with misrepresentation of occupancy and appraisal quality." In particular, she said, "There has been a lot of sloppy underwriting of late."

Freddie Mac issued new guidance this past summer addressing the calculation of income, creditworthiness and required documentation, which, according to Ferran, were "intended to prevent repurchases on the back end." The guidance is effective after Oct. 1, 2009, with loan deliveries to Freddie after Jan. 1, 2010. On the bright side, Ferran reports that her agency is seeing "some of the highest-quality loans in years, with LTVs [loan-to-value ratios] in the low 70s, FICO[R] scores at 740 and up, with debt-to-income caps mostly around 50 percent."

Also speaking at the CMBA's Western Secondary Market Conference, John Doulong. senior director of client portfolios, based in Cherry Hill, New Jersey, for Ally Bank (formerly Horsham, Pennsylvania-based GMAC Bank), described the tightened state of affairs in warehouse lending. With 150 customers and $5 billion in facilities outstanding, Ally saw "some rays of sunshine in the first and second quarters of 2009," according to Doulong, who added that "a few lenders are stepping back in, like Chase and Citi."

He continued: "The 2008 exit of Wall Street took out capacity and liquidity." But the correspondent model is coming back, according to Doulong, who said it is "the only way to get into our [warehouse funding] queue; we would not look at someone coming in as a cold call."

To qualify for a warehouse line from Ally Bank, Doulong said the process takes at least 90 days--"but the real key is getting up in the queue, because pipelines are so long." The reason? "Due diligence today is more extensive than at any time in the past. We're really digging deeper and looking harder," he said.

The same is true throughout today's financial markets, according to William Dudley, president and chief executive officer, Federal Reserve Bank of New York, who said, "Securitization markets are still significantly impaired." Discussing the Term Asset-Backed Securities Loan Facility (TALF) program, initiated last fall to support the issuance of asset-backed securities (ABS), Dudley said, "Although some are concerned by the prospect of TALF investors achieving relatively high rates of return, I think that concern is misplaced. Investor participation in this program is absolutely essential if we are going to improve the availability of credit and bring down the cost of credit for households and business."

The venue for Dudley's comments was a special conclave, the Public-Private Investment Program Summit, co-hosted by the New York-based Securities Industry and Financial Markets Association (SIFMA) and the Hartford, Connecticut-based Pension Real Estate Association (PREA) in New York in June.

Speaking at the same SIFMA/PREA event, Scott Romanoff, managing director, Goldman Sachs, New York, said TALF "ultimately created confidence and a view [in conjunction with the bank stress tests] that you could 'ring fence' losses without disposition [of assets]. …

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