| Mortgage Execs Ponder IO Risks
Alternative loans untested June 7, 2005 By NEIL J. MORSE |
| Several mortgage executives recently discussed the acceleration of nonprime interest only production, investors’ growing appetite for these loans and the possible associated risks.
As the market share of IO mortgages increases (31 percent in 2004), and some states like Georgia and California now report 50 percent and 47 percent IO shares respectively, lenders are issuing cautions about the proliferation of these and other new loan products. “At our company, every Friday, we have product idea meetings and it’s a free-for-all,” says S.A. Ibrahim, who was, until recently, president and chief executive officer, GreenPoint Mortgage Funding, Inc., Novato, Calif. (Since publicly making this comment in early May, Ibrahim has moved on to the mortgage insurance sector.) Typically at these meetings there will be 18 new product ideas, reports Ibrahim. “You think, ‘how can there be so many ideas in this business’?” The industry, he marvels, “has an amazing innovation attitude.” No doubt. Steve Skolnick, executive vice president, First Franklin Financial Corp., San Jose, Calif., notes that “IOs are making a huge play right now” and what’s more, half of all total loans are stated-income, according to Skolnick. “Borrowers are trying to find ways to get into homes and the capital markets have the appetite for that product,” he says, predicting a continuation of the trend. The “real issue,” notes John Robbins, vice chairman of the Mortgage Bankers Association and Chief Executive Officer of American Mortgage Network, San Diego, “is that we’ve never seen how [some new products] perform. We are making ‘edge-of-the-envelope’ loans and if [rates] jump is there going to be a price to pay” for this? he asks. Picking up the vernacular, Adam Bass, senior executive vice president, Ameriquest Mortgage Company, Orange, Calif., says: “Anytime you push the envelope, with products that have never been offered, there’s risk.” One driver of the surge in new products is the “dramatic shift in profits for subprime and Alt-A loans in the last nine months,” says First Franklin’s Skolnick. “Many firms are experiencing half the margins they used to make from just a year ago. If you are not out there pushing your costs down and building differentiation in your sales you’re going to get squeezed in the next year and it’s going to be difficult for smaller lenders to be successful,” he insists. Confirming this trend, Todd Hempstead, vice president, structured transactions, Fannie Mae, said recently that “levels for execution are some of the tightest and most competitive levels that we’ve seen in recent history.” Hempstead lauded the nonprime segment, noting that, it “continues to be poised for another tremendous year.” Demand for this product continues to be strong with a never-ending supply of investors, he said. |
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Neil J. Morse is a communications consultant and independent writer working exclusively in the mortgage finance industry. He resides in Newtown, Conn. and may be reached by e-mail at:Â NeilMorse@MortgageDaily.com |
