Some mortgage originators who specialize in lending to home buyers with less-than-pristine credit histories may be squeezed out of the market if Fannie Mae and Freddie Mae begin securitizing B- and C-level loans.
The secondary mortgage market entities both acknowledged that recently placed Department of Housing and Urban Development 30/30 goals, which require increased lending to low- to moderate-income home buyers and in central city areas, may be hard to reach--particularly interim 1993 goals.
And some analysts think one way to reach those goals would be to broaden the playing field by creating underwriting standards for B- and C- quality home buyers. But organizations in the mortgage origination industry--such as Advanta, The Money Store, and Alliance Funding--could suffer from a dearth in business if those underwriting standards are created.
If Fannie and Freddie moved B-and C-level lending into the secondary market, "the traditional second-lien lenders are probably going to get hurt by it." said Andrew Jones, senior staff vice president at Duff & Phelps Credit Rating Co. "They have [those] loans in their portfolios, and they're originating second loans.
"In some cases [these organizations] refinance existing first loans with a new second--essentially a cash-out refinance--so if Fannie and Freddie get into this market, they might take business from them. What most people don't realize is that some of the so-called 'home equity lenders' are actually originating a lot of first liens as well."
B- and C-level lending is gaining popularity in the private-label field, enough so that both secondary market giants are casting a watchful eye on its progress. And what has made it attractive to the private labels might also make it attractive to them.
Credit rating agencies determine the quality of loan applicants by assigning borrower ratings ranging from A-plus through D. A-quality loans represent borrowers with virtually pristine credit histories. B- and C-quality borrowers are typically considered more of a risk because of blemished credit histories that include one or more 30-days late entries on a mortgage loan and similar entries on consumer or credit card accounts.
A recent Duff & Phelps report on the securitization of B- and C-quality loans said the market for these loans is increasing because lenders have found these loans provide an expanded access to capital for use in generating more loans. Lenders have also found the borrower risk isn't as bad as portrayed by the credit agencies, the report said, mostly because many A-quality borrowers either suffered dislocation and temporary unemployment because of the recession, which made them late on some payments and blemished their credit histories.
"[The private market] is growing very slowly," Jones said. "A lot of people are chasing down the same product. and it's not clear whether new entrants would be able to get business without taking business from the existing players."
"We'd have to find out what they wanted to do," said Janet Point, vice president of investor relations with Advanta Mortgage USA. San Diego, and a former Fannie Mae investor relations specialist. "But there's probably a lot of ways we could participate. There would probably be some aspects that would be competitive, but there would probably be some opportunities, too."
Other lenders agreed.
"There's been fierce competition in the home equity lending market for a number of years," said an investor relations spokesman for The Money Store in Sacramento, Calif. "It's an inherent risk in business that if you have a good product in a strong and growing market niche, that other people are going to see your success and [try to] compete.
"If you look back over the last few years, there has been a significant increase in participation by the banking industry in home equity lending," he said. "And we've continued to grow our business within that environment. If this element of competition were added, we'd consider it just another aspect of competition. We'd deal with it at the time and do what we felt was appropriate to maintain our market share."
While many B- and C-level borrowers might be good risks, all of them won't be. And should Fannie Mae and Freddie Mac get involved, Jones said, they must be ready to deal with the negative aspects as well.
"If the agencies get into B- and C-lending, they're going to have to make some hard decisions," Jones said. "They're going to have to service these loans in the appropriate manner, which is very aggressive. And it does mean putting people into foreclosure--with some deadbeats, that's the only way to get them to pay. The idea that some quasi-governmental agencies are putting people into foreclosure may not play well at all. But that's the only way they're going to make this work."
Whether the GSEs get involved with B- and C-lending may not be up to them. HUD--or Congress--may play a role and at some point. "It's quite possible that Fannie may feel the pressure to get into that business," said Point.
Neither GSE has reached that point, however.
The concept has difficulties, said Cheryl Regan, a Freddie Mac spokeswoman, who said the agency worried that B- and C-lending might steer potential borrowers in the wrong direction by qualifying them for loans whose payments they couldn't maintain. She also said that there may also be problems developing standardization guidelines. Fannie Mae declined to comment.
