The following article by Mr. Eickhoff, president and chief executive of Advanta Mortgage USA, San Diego, originally appeared in a slightly different form in Equity, published by the National Secondary Market Association.
As mortgage lenders, many of us have prospered during this time of great change. The marketplace has been flooded with quality homeowners wanting to change to lower interest rates. But what happens when refinancing by "A" credit quality customers dries up?
Enter the world of noncoforming mortgage lending. To define nonconforming is simple. It's anything that Fannie Mae and Freddie Mac are not.
Jumbo mortgages, home equity credit lines, construction loans, swing and bridge loans, loans for credit quality less than A, and higher loan-to-value or debt-to-income ratios, are all examples of conconforming mortgages.
In today's economy, with high unemployment and depreciating home values, a growing number of nonconforming mortgagess are coming from the quality-credit segment.
A Different Culture
As the economy began to run into trouble, nonconforming credit lenders saw their market share increase.
A nonconforming loan is different from a traditional mortgage, and nonconforming lenders understand the unique ways required to originate, underwrite, fund, service, and securitize these loans.
Like any industry with an increasingly high profile, the nonconforming market is also a favorite target for regulators.
Ill-conceived restrictions on products and prices will likely drive some niche lenders out of the market and increase pricing to those consumers in high-risk classes.
Not a week goes by that I don't hear - sometimes rumor, sometimes fact - that a traditional conforming mortgage lender has entered the nonconforming market.
And although this highly profitable and fast-growing market can be irresistible to conforming lenders, it's a completely different culture.
Let's say, for instance, that you own a boutique specializing in women's clothes. You notice an increase in sales by children's clothig stores and you decide the growing children's clothing market is an area you wish to expand into.
So you add a line of children's clothes in you existing retail locations, and you've become a children's clothing retailer.
Except everyone knows there's a big difference between buying, selling, merchandising and marketing women's clothes and children's clothes.
The same holds true for conforming and nonconforming mortgages. The only trait they share is that they are both secured by real estate. Success in one merket can't predict success in another.
I look at the growing nonconforming market as a great opportunity. As lenders, we can continue to specialize in what we do best, and become better at how we do it.
The consumer emerges from all this change as the big winner, with more credit opportunities and more lenders to choose from.
