Mortgage bankers looked into their crystal balls during the Mortgage Bankers Association Convention in Chicago Oct. 26 to 28 and saw their future inscribed on high-yield, low-rated paper.
Considered by many lenders as a risky, far-off niche relegated to small lenders, B- and C -designated loans have caught the attention of some industry giants. They were identified as an emerging trend by MBA panelist Paul Reid, president and CEO of American Home Funding, Glen Allen, Va., a subsidiary of Rochester Community Savings Bank. Reid predicted, during a roundtable discussion on the coming year, "this [product] is going to take off."
With no official definition, the mortgage and real estate industries have borrowed the term "B and C lending" from the securities world that uses A, B and C to designate the ratings of various tranches. In this case, B and C describe borrowers with less-than-pristine credit histories.
While the emergence of these products could gain from a market that would securitize them, Fannie Mae and Freddie Mac's move toward the new market niche hasn't been slow and calculated, it hasbeen immobile.
Both government sponsored enterprises acknowledge that they have looked at the product. But neither feels the time is right to venture out into buying B- and C-rated residential paper. They have opted instead for more aggressive affordable housing initiatives like the ones announced during the conference with Countrywide and Sears Mortgage that target enhancing lending in central city areas.
Dan Russell, chief of affordable housing at Freddie Mac, said that underwriting guidelines would have to be changed, to a great extent in some cases, to accommodate these loans. That proces which Freddie would presumably be opposed to - could be avoided with new support products to help them conform. "One of those products could be in the form of credit enhancements," he said.
Credit enhancements, instruments that help reduce the risk of loss by front-loading a security with capital as a condition for sale, have been successful in the securities world and have made many otherwise unattractive securities saleable. Funding for these enhancements could come from various government, state or national nonprofit organization programs. But to what extent these organizations could help borrowers - and in what volume - isn't clear, Russell said.
The attractiveness of GSEs' doesn't appear strong, and determining the size of the market, should it become involved, is unclear. What is clear, however, is that any such move will aid the credit-marred populace and may have little effect on the GSEs HUD-set low- and moderate-income lending goals.
A growing portion of Fannie and Freddie customers are leaping into the market and are having various degrees of success offering products such as fixed rate home equity loans and second mortgages.
Many exhibitors boasted nonconforming B and C products and others were looking for people who could provide those services.
"I know there's a market out there," said Jim Enright, president of Mortgage Choice, a brokerage firm in Raleigh, N.C., that has originated $215 million in loans so far this year. "And offering these loans isn't as risky as some people think."
Enright, who is pursuing a lender to help drive his B and C program, said while there is some risk involved in offering B and C paper, a lot of the gamble is mitigated by the yields expected from the higher points charged to the borrower as a loan condition - sometimes two-to-three points higher than with conventional loans.
B&C Loans: Market Niche for Post-Refi Days
Looking for a foothold in the post-refi days, mortgage bankers are considering lower-quality paper as a potential market niche. A Mortgage Bankers Association mortgage market roundtable panel predicted an increase in B- and C-level loans in 1994 and some of the market's bigger players are already involved.
The sampling taken outlines some of the more recent general criteria required by lenders to qualify the typical B and C-quality loan. The data are taken from four mortgage lending exhibitors at the MBA Conference in Chicago Oct. 26 to 28: Advanta Mortgage USA, San Diego; Quality Mortgage USA, Irvine, Calif.; Saxon Mortgage Funding Corp., a subsidiary of Resource Mortgage Capital, White Plains, N.Y.; and CitiMae, a subsidiary of CitiCorp, New York City. Each offers a program catering to the needs of borrowers with blemished credit histories.
The level of B and C lending described in the chart does not represent actual program names, but rather the type of B and C program offered by each. Loan-to-value and debt-to-income ratios are listed, as well as number of mortgage payments 30 or 60 days late allowed under the programs. I30 and R30 represent the number of 30 days late allowed on installment and revolving charge accounts. Points and interest rates charged for loans varies from lender to lender.