Secondary Market Is Less of a Gamble with Technology

By Jones, Ed | Mortgage Banking, October 2005 | Go to article overview

Secondary Market Is Less of a Gamble with Technology


Jones, Ed, Mortgage Banking


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. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Secondary Market Is Less of a Gamble with Technology
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.