LAS VEGAS-The question of whether the current mortgage market is "risky" or "ripe" depends on how a financial institution delivers the loans, according to Kim Westover.
Westover, VP of mortgage lending for $686.6-million One Nevada Credit Union (formerly known as Nevada FCU until a 2011 charter change), said his CU sells most of its mortgages directly to the secondary market.
"We retain servicing on a handful of loans, but most of them we sell to Fannie, so there is very little risk," he reported. "That said, we are looking at revenue sources that have become fewer and far between with all the regulations that have been imposed on everything. If we had the ability to keep the loans on the books there is not a lot of risk, as the best time to make a loan is when the market is at or near the bottom. Everyone is making the same types of loans and getting the same documentation. It is definitely a good time to make mortgages."
Although interest rate risk can be present on 30-year mortgages in portfolio, Westover said there are no indicators of an appreciation in cost of funds in the near future.
"The spread right now is pretty wide," he assessed. "The rates are so low the loans are likely to stay on the books for a long time, so there is less risk of prepayment. If we were going to retain loans and servicing, we would be inclined to hold on to 10-year and 15-year loans and still sell the 30-year loans."
One Nevada's underwriting standards have changed little in one sense, Westover said, because it has "always complied" with Fannie Mae guidelines and it continues to do so even as guidelines have changed.
Dealing With Verification Rules
"The rules have changed a bit," he said. "The biggest change is verification of income and assets. Even with Fannie Mae loans, back in 2005 if the borrower had a good credit score and stated good reserves, the only real requirement was a phone call to verify employment. Now we are required to have two years of tax returns, full verification of employment directly from the employer, and at funding there is a second call to reverify to make sure they still have their job."
Credit quality in borrowers has been "really good." Westover said there is a perception rooted in reality that there is credit tightening by financial institutions, so people are not bothering to apply if they have poor credit.
A second factor in driving good quality is home affordability is at an all-time high in Las Vegas. One Nevada is getting applications from casino workers who have been on their jobs for seven to 10 years and up until now had always rented.
"These people have good credit, good use of credit and low debt, and if they've held their job this long they probably will keep it," he said.
Westover noted local real estate values are low, but relatively firm, but higher-end homes may see some value slippage. Those took longer to be affected, he explained, because the owners made good money and had reserves to keep making payments for several years.
"Some stats are deceiving, because it doesn't take many $1-million homes to slip to $700,000 to affect the market," he said. "But overall I think we have been bouncing along the bottom for the last year. The houses people are buying now could not be built at those prices."
Prices are down due to a number of foreclosed properties being on the market, and One Nevada is willing to write mortgages on those. Westover said such distressed properties often have title issues or unannounced liens that have to be cleared up.
"It keeps everybody busy, but as long as borrowers meet all requirements we make the loans," he said. "We do not participate in programs where the home has been torn up. We want our members to buy the house, get the keys and move in. There are some homes that don't have a stove or plumbing and things like that. Those properties have to be brought up to livability."
Additional Compliance
The additional compliance that has to be integrated into day-to-day lending activity is the biggest change to One Nevada's mortgage processes, said Westover. This includes the credit union being "more stringent" in obtaining documentation from borrowers, and what previously were considered extraneous issues now are checked thoroughly.
For example: if someone is buying a second property, the purchase has to be justified, he noted. Whereas previously a brief letter of explanation from the borrower was sufficient for a questionable item on a credit report, today extensive documentation is needed. Similar rules apply to changes in employment and medical hardships.
Despite the stresses on the GSEs, Westover said One Nevada has experienced little effect on its mortgage operations.
"I don't see Fannie and Freddie being less willing to purchase loans, they just want to make sure the borrowers are doing what they say they are," he said. "So we just have to continue to comply with whatever the regulations are updated to be."
One Nevada is "heavily advertising on all channels" the fact it is doing mortgages, Westover said.
"This is a good time, and we are making as many loans, number wise, as we did at the high time, but the dollar amounts are 35% to 40% of what they were. What was a $350,000 loan in 2005 is a $150,000 loan today."
