With rates rising, refinances declining, and fewer homes on the market for sale, it is no surprise that mortgage lending is tight.
Although the outlook for the 2018 purchase mortgage market seems good, overall business will be off from prior years with the same lenders all vying for their piece of a smaller pie.
To compensate, lenders are loosening their credit standards in attempts to attract and qualify more borrowers. A recent Fannie Mae survey found that the number of lenders that have eased their underwriting standards is now at an all-time high (since they began tracking this information).
Around 25% of the lenders surveyed said they had eased their credit standards, with around 20% saying they will continue to do so over the next few months. This includes credit standards for government and non-agency loans as well.
According to Doug Duncan, Senior VP and Chief Economist at Fannie Mae, lenders’ comments indicate that competition, coupled with more favorable guidelines for agency loans helped to bring about the easing of underwriting standards for current loans.
With less business, increased costs from compliance and staffing, lenders are seeing reduced income. Something had to give. For now, that something is credit standards. But, as we learned (the hard way), that can be dangerous.
Granted, with the problems experienced in 2008, the creation of the CFPB watchdog and the advent of QM and ATR, underwriting got a little tight.
The result is that many consumers were shut out of the market. However, to date, we’ve seen no actions nor regulatory enforcement related to violations of the new QM or ATR rules.
Lenders seem to have some wiggle room to originate more loans under the QM and non-QM standards, if they are willing to take a little more risk and carefully underwrite the loans originated, albeit at the eased standards.
Lenders will also need to work a little harder and smarter to find new business and get the borrowers qualified, but it can be done.
Trained, qualified underwriters will be back in vogue but they’ll need technology to support their efforts to streamline processes to help improve efficiencies. QC review results become increasingly more important.
These will identify potential problem areas, problem loans, and defects that may be addressed up front and corrected during processing before loans get to underwriting and closing. This will allow underwriters to spend the needed time on the loans that may close. All of this reduces wasted time, effort, and cost.
Don’t overlook the benefits that can be realized from well-planned and executed, pre and post close reviews.
Data mine the loans reviewed to determine process improvements, training, and potential for problems. This information will prove invaluable in identifying ways to improve the lending process and profits.
Business is going to be tough in 2018. You’ll need to find some ways to leapfrog the competition.
One way may be by easing of your credit standards. Not a bad design, when coupled with sound underwriting, an integrated pre and post close QC program, and a commitment to loan quality and compliance.