As non-prime booms, take care to pick the right lender

by Ryan Smith22 Aug 2018

The non-prime market continues to grow by leaps and bounds.  But as the number of players in the market increases, it becomes more and more important for mortgage pros to be mindful about which companies they do business with, according to Will Fisher, senior vice president and national sales and marketing director for Citadel Servicing Corporation (CSC).

“The overall mortgage market funds $1.4 trillion a year,” Fisher said.  “We think in a healthy market, the non-prime space should be anywhere from 3% to 5% of the overall housing picture.  We’re barely at 1% right now.  We see non-prime expanding by a good two to three percentage points.”

Fisher also predicted that CSC’s business would continue to boom.

“We predict that next year we’re going to be anywhere from $2.5 billion to $3 billion in funded loans, and if anything, that’s a modest view,” he said.  “We’re experiencing steady growth – we’re growing an extra $10 million to $15 million in funding every month.  We think September will be pretty magical.  Many people are getting into the space and we’re seeing a lot of correspondent activity as well.”

But as the non-prime space booms, some lenders are entering without a clear idea of how the product works, Fisher said.

“We’re seeing many companies getting into the space who think it’s like the old days, and we’ve seen a couple of companies jump into the space and get pushed out,” he said.  “Some companies are running a bit looser on the way they underwrite and the way they fund their loans and not considering the audit, which was not a prevalent part of agency lending.  They’re finding out that’s not the way you run a non-prime operation.”

Fisher said many lenders enter the space without realizing the level of extra scrutiny non-prime loans face.

“They’re in such a rush to get into this space that they’re willing to cut corners, and you just can’t do that in this space,” he said.  “It’s not 2004; investors are scrutinizing these loans.  The rules and regulations today are much more stringent.”

The non-prime borrower also needs to be approached differently than borrowers in traditional loans, he said.

“These applications take extra hand-holding,” he said. “There’s a reason that these loans have a point or a point and a half larger interest rates than a prime loan; they’re more difficult to underwrite and there is layered risk.”

That’s why CSC takes extensive measures to make sure non-prime is done right and their wholesale brokers and correspondent sellers are trained appropriately and thoroughly, Fisher said.

“When you work with CSC we take a white-glove approach to educate our brokers and sellers to understand what a non-prime borrower looks like, top to bottom, and that’s why our paper performs very well,” he said. If you don’t have that understanding, you’re going to find out very quickly that these aren’t just cookie-cutter loans.”

With so many inexperienced lenders now taking a shot at non-prime, mortgage originators looking to get into the non-prime space should choose their wholesale lender and correspondent buyers carefully, Fisher said.

“You need somebody in the space you can trust – someone who doesn’t just fund the loan and put you in a bad position, but someone who can really show you why you should or shouldn’t do a particular loan,” he said. “That makes your business stronger and separates you from the rest.”