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   ARTICLE   |   From Scotsman Guide Residential Edition   |   February 2014

Find the Right Fit of Niches

Dodd-Frank regulations may temporarily hinder, but not eliminate, specialty services and products

Find the Right Fit of Niches

In the past, mortgage companies created a culture of niches. Mortgage professionals offered unique products and pricing to stand out from the competition. But new regulations brought about by the Dodd-Frank Wall Street Reform and Consumer Protection Act have made many of these specialties impossible, at least temporarily.

This past year, however, many mortgage professionals finalized plans to handle the new regulations and are no longer so concerned about the impact of the new rules on day-to-day operations. That could spell a resurgence for niche products, but only time will tell what those products may look like. What’s the future of fashion for niches?

Dodd-Frank is prompting a shift in industry philosophy. Mortgage brokers and originators should pay attention to where the industry is headed as new regulations likely will affect the specialty products and services that companies can offer. Although niches won’t disappear, they will change, and mortgage professionals need to know where to find them.

Limited options

Prior to Dodd-Frank, the mortgage industry became what many other industries are: a culture of niches. Companies had many options and stood out from their competitors by these specialties. Lenders offered their own unique products and cultivated expertise in them.

The new ability-to-repay rule (ATR) established the regulation for lenders to refuse qualified mortgages (QM) to borrowers with a debt-to-income ratio exceeding 43 percent. As a result, mortgage brokers and originators can no longer afford to cater to specific customers. The new guidelines simply burden lenders with too much risk. So, companies are no longer offering as many specialized products and are trying to separate themselves from their competitors in a more nebulous way: by promoting their superior customer service and responsiveness.

Mortgage companies will need time to adjust as they navigate these new regulatory waters. Some large companies have announced they will originate non-QM loans, but it is unlikely they will buy non-QM loans from other institutions. Most lenders, therefore, will be confined to QM loans, at least until they learn more about the effects of the ATR rule and understand what risks investors are willing to take.

Larger banks can afford to take risks by funding their own non-QM loans. Smaller banks have certain exemptions. These companies at the two extremes should come closest to maintaining business as usual. Mortgage professionals in the middle have to compete with more limitations and they will generally offer the same products as their competitors. That means that these midsized companies could lose their main tool for standing out — their niches.

Competition

With the new regulations governing QM loans, companies can no longer separate themselves from the competition with price and unique products. They now have to focus on marketing and sales. This is more difficult to do. Instead of unique terms, pricing and products, companies must sell borrowers on a message that their service is superior to that of a competitor. Superior customer service is more difficult to define and market. What is considered excellent customer service and the ideal sales experience differs greatly from consumer to consumer, making this niche harder to pin down.

In addition, with the restrictions on QM loans, eligible borrowers will be harder to find for companies that do not originate non-QM loans. The main priority for a company will be to find qualified buyers, rather than a specialty niche.

Competition is good for the market. It is good for consumers because lenders competing for business create consumer advantages. It is good for lenders because it keeps them sharp. Furthermore, any rules or trends that limit competition generally draw criticism from midsized and small lenders, who rely on such competition to fuel their business.

Because competition is a necessity, the industry must find ways to continue to foster it despite challenging new regulations. Nonbank mortgage companies typically look for niches and specialties to do just that. So now it’s just a matter of these companies finding their place in the market.

New niches

Most niches were closed out largely because of new regulatory constraints. One might assume, then, that new niches will forever be closed out of the market. But if “necessity is the mother of invention,” new ones will appear over the next year. Niches are the only way for mortgage companies to distinguish themselves from competitors and drive business.

Niches will not cease to exist. They will evolve and take new shapes that allow mortgage professionals to foster business and drive competition while respecting the new regulations — all without imposing undue risk on lenders.

For the last six months of this past year, mortgage professionals were told that lending will be defined by uncertainty in the first half of this year after the new Dodd-Frank regulations went into effect in January. Nowhere is that more true than with specialty services and products. Because these were eliminated in their previous forms, institutions must recast significant aspects of their businesses.

Although it is unclear how mortgage professionals will respond to this challenge, institutions will be forced to be creative. Mortgage professionals will carve out niches. Competition has not been totally regulated out of the market and there is still room for mortgage companies to find a new forte.



 


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