All we seem to read and hear about in the mortgage industry these days is how subprime and nonconforming loans are taking center stage.
Almost every large, midsize or small mortgage banker seems to be rushing into the fray. Even normally conservative Freddie Mac/Fannie Mae mortgage lenders have a real zest to board the subprime bandwagon. There is a ton of untapped equity and a corresponding level of consumer debt.
Within three to five years, the market for nonconforming B and C credit borrowers will evolve into a key area of mortgage lending.
Although job growth appears strong in most regions of the United States, many people with decent jobs and better than average credit histories are taking on more debt than ever before. People are using plastic to buy everything from groceries to automobiles.
The bottom line is that many consumers will find it difficult to pay off these card balances and will tap the equity in primary and vacation homes and investment properties to do so.
Within five to seven years, the baby boomers will reach their spending peak - not only for credit card purchases, but for home furnishings and renovations, college tuition, medical expenses, weddings, vacations, and sometimes for failed business ventures. And some will wish to refinance, creating a repeat business opportunity for the mortgage banker.
But caring for a potential borrower and sensitivity to his or her plight is extremely important. A loan officer who works with B or C clients must be a good listener, sympathetic to an applicant's special problem or requirements.
As the subprime business grows, so will servicing departments. What good is making a loan if you can't collect the payments?
Booking the transactions is only part of the picture. You had better be able to collect the monthly payments to really succeed in this business. But even considering this hurdle, the future of subprime first and second mortgages appears very strong.
Newer products include the 125% loan-to-value product, 203(k) mortgage loans, and adjustable loans of all kinds. In time, the industry likely will see a 150% loan-to-value loan - despite the inherent high risk, especially with C-credit borrowers.
Another area of growth and opportunity is mixed-use/multifamily lending. Most banks have ignored the $50,000 to $1 million loans in this market, leaving an untapped product niche.
The more sophisticated home equity players also will diversify into commercial lending and equipment leasing. To keep customers on the books, companies will offer a wide range of promotions and services.
Rate fluctuations, as in the past, will have no noticeable effect on B and C home equity lending.
If subprime mortgage lenders are straightforward with borrowers, provide innovative loan products, and maintain servicing that is flexible to clients' needs and personalities, they will secure a piece of the rapidly expanding B and C market.