Banks will have to remain vigilant if they want to step up mortgage lending to credit-impaired borrowers, industry experts warn.
"Quality control is the most important thing you can do if you want to be successful," said Neil B. Kornswiet, president of Quality Mortgage USA, Irvine, Calif.
Mortgage companies must adopt systems to detect unscrupulous consumers and their representatives, Mr. Kornswiet said at a mortgage conference in New York sponsored by Executive Enterprises, a firm that specializes in financial seminars.
For a long time, most lenders treated borrowers with marred records as pariahs, but that mind-set is changing, Mr. Kornswiet said.
Right now, about 200 lenders, including bank-affiliated units, are "strongly" in the business of lending to credit-impaired customers, he said. These credits are commonly called B and C loans, since they fall below the A quality that most lenders prefer to deal with. They are also called subprime loans.
The B and C products, which can include first mortgages and home equity loans, typically compensate for their greater risks by carrying higher rates and fees.
Regina J. Reed, senior manager with the mortgage group of KPMG Peat Marwick, New York, said these loans can be more profitable than conventional loans.
"But they can also be riskier," Ms. Reed said.
Indeed, borrowers who are desperate for financing may go to fraudulent extremes, executives said.
Customers with tainted credit are more apt to submit false income documents and to make properties appear to be worth more than they are, executives said.
Brokers are not above using unscrupulous methods in hopes of receiving their commission on a harder-to-land loan, the executives added. One mortgage banker told of brokers who puffed up customers' net worth by submitting doctored tax forms.
Brokers have also been known to make large deposits of their own money to temporarily boost prospective borrowers' bank accounts. "This is the way lenders get taken to the cleaners," one veteran mortgage banker said.
Bankers should train their officers to spot red flags by reviewing loans that soured in the past, said Jonathan Davis, vice president in the real estate finance group of Donaldson, Lufkin & Jenrette.
By understanding the reasons for defaults and delinquencies, loan officers will be equipped to make appropriate changes or modifications during the underwriting process, Mr. Davis said.
Underwriters should also be kept abreast of how well their loans are doing and how collection efforts are going with problems in the portfolio, Mr. Davis said.
Banks would do best to get loan officers who have experience with consumer finance, said William Garland, senior vice president at Advanta Mortgage Corp, San Diego.
"We've not had a good deal of success bringing people in from conventional shops," Mr. Garland said.
He also said loan collectors would get a better sense of their customers "by keeping track of their excuses for late payments. Somebody's mother can die only so many times."
