POWAY, Calif. -
Lender Support Systems Inc., was founded in this San Diego suburb in 1982. The company says it offers a suite of e-Mortgage technology solutions that establishes a platform upon which mortgage brokers, bankers and service providers can build cost-effective loan origination and servicing operations.
Cary Burch, CEO of LSSI, told Credit Union Journal said he sees a change occurring in the post-subprime mortgage market meltdown.
“What we are seeing on the credit union side...is an uptick in funding loans, especially mortgages, and many of these credit unions are finding Excel spreadsheet systems that worked well for 25-to-50 loans don’t work any more,” he said.
CUs built their loan portfolios with a focus on quality originations, but Burch said a lack of technological capability to service a growing portfolio creates new quality problems. “Loan servicing is very complex: many higher-echelon requirements need to be met, such as dealing with credit bureaus,” he observed.
For most of 2007, the mortgage markets, and later the credit markets, roiled as the subprime lending crisis grew. Nevertheless, Burch said, in the last six to nine months he has seen more credit unions entering the mortgage space.
“Many lenders have pulled out, many mortgage brokers have disappeared, and people have wondered where to go,” he said. “People use their credit unions for auto loans, but have not leveraged them for mortgages.”
What credit unions find as their mortgage volume grows, he said, is a sharp rise in the number of reports they are required to perform. He said most credit unions are not sophisticated enough to service mortgage loans–a process that includes calculating interest rates on impound accounts, generating 1098 and 1099 reports to the Internal Revenue Service at the end of the year, reporting to the three credit bureaus on the performance of the loans, and initiating borrower communication in the case of late payments.
“There are certain regulations regarding notification of rights to borrowers, and there is a risk of huge penalties,” he said. “We track all compliance changes in all 50 states. The IRS does not put out a huge bulletin, and credit unions have to know where to go to find it. If they don’t, they’ll be out of compliance.”
The mortgage transaction, even the origination side, is a complex transaction, said Burch. But it is the servicing side, with the necessity for investor reporting and reconciliation, that is “even more complex.”
“A lot of cash comes in the door, which must be tracked, and the credit union is cutting checks to insurance companies and tax authorities. Then, the portfolio’s performance must be tracked. The complexity of managing a portfolio is huge, and many financial institutions underestimate this complexity. Many credit unions do not have in-house attorneys to keep track of compliance changes.”
And just when CUs get caught up, in come new products, such as reverse mortgages, he noted.
Though credit unions have just a small slice of the mortgage lending market, Burch believes CUs are well-positioned.
“This market is conducive to the growth of credit unions because borrowers will be loyal,” he predicted.
Burch foresees “a lot of private money coming into play” in the lending space. He expects some hedge funds–which are used to managing risk–will step in.
“Borrowers have lost their homes, but they still have jobs and they kept their cars and credit cards,” he said. “The appetite for mortgage-backed securities will not come back for about 24 months, so we will see private money entering the market and will be lending through private networks.”
High-risk hedge funds will be backing private mortgage companies, Burch continued. “When the appetite comes back again, the market will recover, and the smart, private-money guys who placed money with viable borrowers will make a lot of money at that time.”
