by Hitz Mistry
When it comes to a discussion of non-qualified mortgages (non-QM) or non-prime mortgages, quite a few originators may not know all the permutations of alternative product categories available to them to satisfy their borrowers’ requirements. The industry has gone through some much-needed adjustments with the introduction of stricter rules and regulations in this Dodd-Frank decade, creating a new and better generation of alternative lending. The result is a markedly responsible lending ethos that, after the much-maligned (and rightfully so) subprime mortgage era, will mark a return to the heyday of finance company giants such as Beneficial, Household, Associates, and Dial Finance that were concerned with owning mortgage debt that paid in a consistent manner.
For an industry segment built on providing alternative lending programs for borrowers who do not fit into the traditional agency mortgage bracket, clarity is something that is needed but on many occasions is overlooked. There has been a significant increase in companies entering this space with the hope that they would be able to cash in or augment other facets of mortgage lending in this ever-expanding market. However, those companies need to recognize that this is a mortgage segment that requires ethical and responsible business practices. Unlike the governmental agency market, the issue is self-sufficiency and self-policing of lending practices. So, who should originators look to as a good example of how to operate in the non-QM market?
Citadel Servicing Corporation (CSC) is one such company that applies rigorous ethical business practices over a unique range of proprietary programs. Where all companies should build a product with profits in mind, CSC takes it one step further. This company has not just created programs that meet the needs of a customer base, but has consistently rejected practices that led to the bad lending results of previous eras. The thought of making a loan and then selling that loan with no regard for future customer experience and satisfaction is anathema for CSC. Thus, CSC has striven to produce loans that are capable of providing its borrowers with sensible loan product, fair pricing, and consistent service – but additionally with an experience that CSC has embraced and termed as “vertical integration”.
So, what does this mean and why is this important?
Firstly, one needs to understand exactly what vertical integration means. In a nutshell, vertical integration is the combination in a company of two or more stages of production normally operated by separate companies. To further expand on this principle, it is CSC’s senior management’s studied opinion – based on over four decades of experience funding loans for personal residences to commercial properties – that a broker or correspondent working with a lender that incorporates all aspects of the mortgage lifecycle, from origination to payoff, will make a big difference in the performance of a loan, as well as likely influence a borrower’s consideration to remain a loyal customer to that originator.
This continuum, known as vertical integration, actually starts at the very beginning of the lending process with pricing and guidelines, continuing through to underwriting, funding, and loan audit. The process ends with the collection of the actual mortgage payments, including impounding and remitting taxes and insurance. This last piece, loan servicing, is where many companies with no experience working with non-QM or non-prime borrowers suffer a breakdown as they release the servicing act with the sale of the loan or place it into the portfolio of a subservicer. CSC is the only organization solely dedicated to the non-QM space that services its loan production.
By being vertically integrated, CSC can be autonomous and efficient in the origination of loans. And that has resulted in a portfolio of loans in excess of $3.1 billion with delinquency rate averaging 3.5% and total losses of $767,000 in over $4.5 billion of closed loan production since 2011.
That’s great, but how does this improve the non-QM landscape?
A common misconception heard constantly in and around the non-QM market is that these loans are much more difficult to process, get approved, and then close. The reality, however, is that while an originator might have to do a little extra work on the front end, such loans go through the system just as efficiently as any other loan if the program and qualification process is structured in the right manner. And this is where CSC is an expert. In an era of automated underwriting systems (AUS), CSC employs a manual method that is definitive and delivers an answer in 48 hours from submission of a full file. In a business where every loan has some sort of “story aspect” to it and a traditional or augmented AUS systems can give false or inaccurate approvals, CSC in that period can analyze the loan and the appraisal, delivering a firm approval subject to conditions. This is where CSC shines when compared with other companies. With all processes in-house and subject exclusively to CSC approval, vertical integration can make a significant difference.
What are the alternative products available in the non-QM/non-prime marketplace?
One of the questions most often asked in the world of alternative income documentation loans is when will “stated income” come back? Well, and happy to say that, this formerly popular but ultra-risky form of qualification is not. So, given the increase in the number of self-employed borrowers who are trying to use adjusted gross income as a means to qualify (it is also important to note that these are not necessarily first-time homebuyers), what does one do to service the needs of such borrowers?
A great alternative is CSC’s One Month Bank Statement program. This is a great example of a product specifically designed to meet customer demand. The One Month Bank Statement (OMBS) program juxtaposes a significant down payment or equity position with a real-world analysis of past and current spending habits to give a defined picture of what the borrower’s capacity to repay has been and will most probably continue to be in the future. This thesis has been born out over the past two years by more than $500 million on originations with delinquency limited to three loans – and only one of those loans is past 60 days’ delinquency, as the home is being sold.
Another example of a product which has proven to be popular is CSC’s Outside Dodd-Frank Plus (ODF+) program. The Outside Dodd-Frank Plus program offers loans on properties up to 35 units and with loan amounts of to $5 million. Seeing the need in the market, CSC created a program that would offer products to borrowers personally or to their business entities and trusts for investment or business purposes. This unique product, when coupled with the original ODF single-family, creates a one-stop marketplace for any loan driven by debt-service coverage ratios (DSCR) with ratios as low as 0.75:1.00. Use these programs for hotels, motels, congregate care, cross collateralized properties, mixed use … or whatever you originate that is not land or construction.
The wonderful thing in this market niche is that whatever can be conceived and risk measured can be priced providing an originator the opportunity to fill their clients’ loan requirements. This is an industry that does not stand still; it is ever-changing and filled with organizations who display flexibility and innovation thus creating a progressive environment. It is in such an environment that CSC thrives in and continues to trailblaze in an industry segment that, if managed properly, will continue to originate responsible and ethical loan production for years to come.
Hitz Mistry is the marketing director for Citadel Servicing Corporation.