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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2014

Go Low to Find New Treasures

Working with low-credit borrowers can be rewarding, if you mitigate risk

Go Low to Find New Treasures

Based on recent economic indicators, the U.S. economy appears to be on a slow, but uneven, road to recovery. Segments of the job market are picking up, but the overall employment picture remains less than ideal. The housing sector has made significant gains over the past several years, but home-price appreciation is clearly slowing. Even though things have improved from the dark days of 2008, average Americans still can’t seem to qualify for mortgages.

Or can they? For mortgage brokers and originators hoping to engage a new segment of borrowers, clients with credit scores south of 640 can present an interesting opportunity. Diving into this niche demands the right approach, however, so originators should be sure that they’re prepared before exploring the sub-640 market.

According to the U.S. Department of Housing and Urban Development (HUD), the average borrower’s credit score was 693 this past third quarter, down five points year over year. That leaves a considerable number of Americans underserved by lenders — particularly commercial banks — as many of these institutions are unable or unwilling to ease their credit criteria as needed. Virtually none of the country’s top 10 commercial banking institutions have shown any interest in moving down the credit curve to serve borrowers with scores below the HUD average, and these institutions together account for a bulk of all mortgage loans written today.

The bright side of this reality is that it presents a substantial business opportunity for those organizations that are willing and able to work with borrowers who have less-than-perfect credit scores. The question for brokers is whether or not this is a segment of the market that they want to focus on — and whether they’re able to do so effectively. Here are factors that you should consider if you’re interested in pursuing more business with this segment of borrowers.

Finding the right clients

In terms of credit eligibility, the market is hardly shrinking, but it is changing — considerably. This can make it a challenge for originators to figure out which segments of borrowers to focus their attention on.

Borrowers generally fall into one of the following segments:

  • Those with great credit who can easily meet today’s loan requirements;
  • Those who don’t meet strict credit standards, but otherwise demonstrate minimal risk;
  • Those who may or may not qualify for a loan, depending on the program presented; and
  • Those who, for financial reasons, are better suited to rent homes for the time being.

For originators hoping to grow their business in the current economic climate, the obvious areas of concentration would be the two categories in the middle.

Although it’s true that these borrowers can be challenging to work with in terms of the time and underwriting scrutiny required, this group also tends to be appreciative of brokers who are willing to work with them to get loans that they may not have access to elsewhere. By finding a responsible way to effectively help these borrowers, originators can gain a loyal customer base that will spread the word and help them grow their business.

Before making the decision to follow the lower FICO path, however, mortgage professionals should determine if there’s a need in their market. To establish what their market demand is, brokers should consider two things:

  1. Who they are generally able to serve and who they typically must turn down for a loan; and
  2. The clients that pertinent real estate agents are currently working with and what types of loans those customers need.

This information will be instrumental in determining which loan options are most appropriate within your target market.

Having a clear picture of who your borrowers are and what they need is key to effectively guiding them toward options that make the most of what they have to work with financially.

Working with the right lenders

Coming back to the fact that the average FICO score in the United States is lower than 700, it may come as little surprise that more lenders are trying to compete for the business of borrowers in the lower credit ranges. After all, there appears to be plenty of demand in this space.

As the emerging sub-640 FICO market continues to grow, lenders working to support this group fall into three categories:

  • Companies that are pushing the limit in terms of potential risk;
  • Companies that are taking a more deliberate and methodical approach to growing their sub-640 business, including servicing it; and
  • Companies that are expanding their guidelines to follow non-FICO-determined paths and waiting to see what happens next.

Within each of these categories are valid opportunities to enable homeownership. Determining the best approach for your business model and the individual needs of your clients requires some consideration, however. It also calls for a close look at the capabilities of the lenders you choose to partner with, particularly in terms of their underwriting and mortgage servicing.

When working with sub-640 borrowers, mortgage brokers should evaluate the processing abilities of their lender partners with a particularly critical eye. Lending to this group of borrowers requires more than a mere willingness to adjust credit guidelines. Processing loans for this group of applicants can present unique challenges, so the underwriting teams assigned to these files must be trained to account for the difficulties associated with loans that are driven by exceptions to the norm. Understanding the specific guidelines and parameters of available government programs is particularly instrumental to success in this space, and brokers must be able to identify lenders that can come through for them and their clients.

Effective mortgage servicing is another crucial aspect of being able to work with this group of borrowers, especially when you consider that many Americans are essentially living paycheck to paycheck. For borrowers in this situation, it sometimes can take just a single unplanned financial event to cause one or more missed mortgage payments. The majority of these borrowers are people who want to make their mortgage payments on time, but simply need some assistance on occasion. When one of these borrowers needs help, having the ability to work directly with them and facilitate realistic plans can benefit everyone involved.

All lending origination comes with an ongoing challenge to mitigate risk, and lending to this segment of borrowers is no exception. Although today’s mortgage environment may call for a more flexible approach to doing business, mortgage professionals also must have the proper procedures and processes in place.

Diligence must be practiced in qualifying borrowers and ensuring that the programs suggested for them are well-suited to their particular situations. This is especially true with government programs, as failing to meet the guidelines set by these organizations ultimately could jeopardize an organization’s government-lender status.

•  •  •

For brokers who want to augment their businesses by working with borrowers in the lower FICO range, there are definitely some important considerations to take into account. In an effort to encourage responsible lending practices and empower brokers to strengthen their businesses, some banks and lenders have created educational series aimed at guiding mortgage professionals in working with borrowers in the sub-640 FICO range.

Brokers who understand the opportunities and limitations within this space can take a big step toward getting more Americans into the homes they want — and responsibly building their business in the process. 


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