As subprime lenders continue to fold their tents, either shutting down or being acquired (most often by secondary market firms), those who remain in business are learning that Wall Street and other funding sources are securely in the driver’s seat.
“The credit line (providers) are calling the tune; they’re our partners now,” shrugs one monoline originator, pleased to still be in operation but not a little bitter about the loss of autonomy demanded in return for continued financial support.
“Wall Street tells us what to do; what kinds of products to originate, then our loan officers tell the brokers and they tell the consumers,” he says, adding: “These guys are not cutting us any slack.”
And, for good reason, perhaps, as last week there were in excess of 300 rating agency downgrades of MBS, asset-backed securities supported by home equity loans, and collateralized debt obligations containing residential and commercial MBS.
In the new, “take-no-prisoners” environment, the rules of the game have changed — or perhaps merely reverted to the “good old days.”
Today’s borrowers must make a down payment, says the originator, “and have the right debt-to-income ratios.”
Yet, he says, “Surprisingly we’re still getting requests (from brokers) for 100 (percent) LTV, 626 FICO loans that would take someone from a $1,000-per-month rent to a $2,700 monthly mortgage payment,” including principal, interest, taxes and insurance.
“We can’t do that anymore,” he declares, noting that in the past, with the proper underwriting, such a loan could be made and, if properly underwritten, it would perform.
But now is not then, says Dave Matthews, senior vice president and chief information officer with the Federal Home Loan Bank of Chicago. He likes the trend toward a more hands-on presence for Wall Street.
“They know how to transform industries,” he says, adding the caveat: “But only if they’re in it seriously” — which he believes they are.
Street wants production business
According to the founder of another subprime originator, which recently was acquired by an international investment firm, the sale had to be made to “save everybody’s job.” He says “the Street wants to own [the] production business,” which means “down the road, it’s going to be harder for the smaller guy to survive.”
In this new investor-dominated market, tighter funding parameters are inevitable, says the first subprime lender, which means a reduced role for the vaunted FICO score.
It is no longer the deity of the past, he says, noting that in a more anxious time, it is less than a reliable indicator of credibility.
“A 750 FICO borrower may have only two trades [accounts with established credit histories]: a cell phone bill and car payment. That could be it for the past 24 months, with no other payment history.”
In a nod to letting market forces solve the problem, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, recently cautioned regulators and legislators “not to overreact, and not cause an unnecessary credit crunch that would end up just hurting the people you are trying to help.”