This will work itself out. Performance on mortgages in Alt-A securities combined with their already higher yields will draw investors back but make no mistake, the process of determining what is in a security will be different for a time and investors are going to expect more, not less or even the same information about the credit criterion of the loans in this type security.
Ultimately, who gets hurt by this spread from Sub-prime to Alt-A is those homebuyers who want to purchase a home but can’t meet conventional guidelines. Without doubt, the industry had spread beyond acceptable risk, however, the result at times like these is to over-correct. The market becomes too conservative and ultimately there are underwriting guidelines that come into play which restrict homebuyers from owning.
It is important now, more than ever, for mortgage loan officers to take the approach of educating the consumer, of helping them PLAN for homeownership instead of searching high and low for that loan program that will accept them TODAY….credit warts and all. Perhaps waiting until that self-employed business is up and running is SOUND and PRUDENT advice and if we need underwriting guidelines to REQUIRE loan officers to make prudent decisions then those guidelines will restrict more than they will help.
Loan officers need to focus on their clients’ lack of savings and encourage them to work on creating a savings plan not only for closing costs, but also for replacing that water heater that breaks 3 months after buying the house.
If the industry proactively moves towards client planning, we will ultimately win more consumers and place better performing loans in all of the securities that we issue.
In the meantime, prepare for continually changing guidelines, lower LTV, lower DTI, and more reserve/asset requirements. Don’t be surprised to see our business reach a point where manual underwriting becomes MORE valuable then it has been in the recent age of automated efficiency. The AUS just doesn’t test reasonability as well and I think it is safe to say that the more non-conforming programs are going to have to stand up to the question of “does this make sense”?
For some originators, this is the time for them to leave the industry, decide upon another career. Times aren’t going to improve overnight. Change has always been a constant but Rapid Change is going to become the new “norm”. For those originators who choose to stick it out and work through this, the industry needs you. Your realtors and builders need you and while the end result will probably be less loans made per year, more education and licensing requirements to enter the business and more regulation and disclosures. There IS one thing you can be reassured by….
Owning a home is STILL the American dream……so there WILL be customers.
© 2007 Ken Stampe
Ken Stampe is a Mortgage Loan Officer with Bank of America in Dallas, TX. You can reach him at ken@homeloandfw.com or visit his blog at http://www.homeloandfw.com
