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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2017

Prepare for Nonprime

Choose your lender wisely for subprime’s successor

kelly non prime 7-17It has been whispered about for years, and the rumors have finally been confirmed: Subprime is back. It has changed its name to nonprime (NP) and completely rebuilt its image with exponentially sounder programs, but make no mistake, nonprime is now primed to take the mortgage industry by storm.

The key to getting out in front of this storm is determining which wholesale and/or correspondent lenders best fit your unique nonprime needs. You might even consider signing up with a secondary lender for niche products.

In today’s market, it shouldn’t be necessary to sign up with more than two NP lenders because product offerings are relatively similar. Two solid lenders should provide access to the vast majority of your NP lending needs as an originator. But which two? Let’s look at some factors to consider when selecting NP lenders.

Comprehensive product offerings

There are certainly similarities between NP lender product offerings, but some lenders have a more restrictive loan menu. The following products are must-haves for your primary NP lender:

  • Personal and business bank statement;
  • Non-owner-occupied light document; 
  • Foreign national; 
  • Prior credit event and lower credit; 
  • Condotels, non-warrantable condos and other unique properties;
  • Jumbo and super jumbo; and
  • Asset depletion.

Additionally, any lender that markets itself as non-QM is not an NP lender. A qualified mortgage, or QM, is one that meets the minimum standards for mortgages established under the Dodd-Frank Act, and affords lenders originating them with added liability protection.

Although there is some overlap, non-QM loans are now offered by even most QM lenders, and they don’t offer the “must-have” products detailed here. Your primary NP lender must offer all of these products or you risk having bankable borrowers walk out your door to find funding with your competition.

Compliance and safety standards

Your NP lender should be an expert in both compliance and information safety standards. Unfortunately, with the recent re-emergence of this product, some lenders may take shortcuts in the lust for quick volume.

With bank-statement programs, for example, determine if the lender evaluates the statements for true income. If they use a standard, consistent deduction for expenses from business deposits, the results may not reflect true income. A baker has a different cost structure than an electrician or an accountant. Applying a single deduction may lead to dubious grounds for passing the “ability-to-repay” (ATR) rule.

Simply because a lender’s guidelines dictate a straight-percentage deduction for business expenses does not mean that your borrower actually meets the ATR rule. If you broker a loan to this lender, you will incur some of the ATR compliance risk.

Another area of concern is the disclosure process. Many NP lenders claim to own the disclosure process, but typically this is only after a full file is submitted. If you make disclosures as the lender knowing the loan will go to an NP lender, you open yourself up to potential violations of unfair and deceptive acts and practices (UDAP) statutes. Working with an NP lender that has a compliant end-to-end disclosure process alleviates this concern.

Finally, with the constant threat of data theft and breaches, it is striking how lax some lenders are about information safety. If a lender asks you to e-mail non-encrypted personal information or documents, that is not the lender for you.

You need to partner with a lender that you can rely on to purchase the loan.

Pricing and lender compensation

Borrowers whose only options are NP products are not as rate sensitive as prime borrowers; however, once NP is accessible to all originators, the sensitivity will increase. As a rule of thumb, your primary NP lender should be within 50 basis points of “market rate.” If the difference is more than 50 basis points, the gap is too great to make up with compensating factors such as fantastic service or expansive product selection.

Additionally, if a lender is not willing to compensate you for originating a loan, then move on. This goes beyond lender paid compensation, or LPC. It is a matter of respecting what you as a professional loan originator add to the value chain.

The second coming of the nonprime market is still in its relative infancy, so the LPC-equivalent to prime levels doesn’t exist and isn’t supported by the market. If a lender cannot discover within its model a way to offer some LPC, however, there are likely other underlying issues that will conflict with your needs and goals. Walk away from such lenders.

Exemplary process and service

Does the lender do things the way you would? It is better to have no product than to have a product with bad service. Every time you set expectations with a borrower or referral source, you put your reputation — and your future earnings — on the line.

Does the lender create an overall process environment that respects this critically important consideration? Ask the following questions to find out: Are your underwriting turn times under three days? How long does it take to clear conditions? What is required for credit approval? Do you underwrite for TBD (to be determined) properties? Do your account executives (AEs) have access to underwriters for clarifications or questions? Is there a scenario desk? Can bank statements be evaluated prior to full loan submission? Do you use our credit report or re-pull the credit?

 Key Points

Factors to consider when evaluating nonprime lenders

•Are product offerings comprehensive?

•Are compliance and information-safety standards adequate?

•Is loan pricing in line with other NP lenders?

•Does the lender offer lender-paid compensation?

•Are their processes and customer service exemplary?

•Can you offer correspondent services or grow into a correspondent?

•Are the account executives top-notch?

Most of these questions focus on whether or not you have a bankable loan, so you can properly set expectations with your borrower and avoid going through a resource-heavy submission process before the validity of the loan can be determined. If the lender does not provide all requisite service tools, then you, your borrower and the Realtor may go through the entire exhausting process only to discover that the lender doesn’t like the loan.

This decision must be reached much earlier in the process so all parties can avoid this needless runaround and aggravation. Ultimately such inferior business structures increase fallout and jeopardize invaluable relationships.

If a lender doesn’t use your credit report, for example, it is likely that 10 percent of your submissions will turn into denials. Using your credit report is an absolute necessity when selecting your primary NP lender. A few negative service policies and deliverables can drop your funding ratio from 70 percent to as low as 25 percent, which will negatively affect your business.

Finally, make sure all of the documents the lender requires for submission are actually necessary and not just “feel good” documents. These are documents that make the lender feel good but don’t have any real effect on the credit decision. Take preliminary title, for example. Why would a lender require preliminary title for a credit-qualification approval?

Future growth and top-notch AEs

Mortgage bankers and originators are in different stages of the NP evolution. Some bankers only originate loans they are banking, while some originators only broker loans through a wholesale lender. Most are a hybrid of the two.

If you only originate loans that you can bank, then an NP lender without a correspondent channel will not work. If you select a correspondent relationship from the onset, verify that the lender will accept conditions — especially questionable conditions — before the loan is funded.

This may be a requirement of your warehouse lender, but it is also a best practice. There isn’t much room for error, and you need to partner with a lender that you can rely on to purchase the loan.

Most nonprime originators are at the stage where they would prefer to broker loans, but this may change as the market continues to understand and accept NP. If you work with a lender that offers both a wholesale and correspondent channel, it will be a relatively seamless transition when you are ready to take the next step, because you are already familiar with the company, products and processes.

Working with a lender that offers both wholesale and correspondent also means you can work with the same AE on all of your loans. Over time, this is a person with whom you will hopefully build a strong relationship — someone you can trust — which brings us to the final factor when choosing an NP lender.

The AE assigned to be your representative can literally make or break a lender — especially an NP lender. These loans and processes cannot be nicely tucked into a manual. It is rare when a loan closes in the same structure as its initial consideration. NP lending is a process with many moving parts and, as such, you need a maestro to conduct your lending orchestra.

• • •

By taking the time to select the best NP lender to fit the needs of your market, you will be able to honestly assure Realtors that if you can’t do a loan, there is no reason to call another originator because it can’t be done. There is no room for second place in this business, and you now have the means to select the best lender to help you tame the coming storm of nonprime business.


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