HOUSINGNEWS REPORT
THE RETURN OF RISK: SUBPRIME SNEAKING BACK
you look at the past, lenders tried to automate subprime lending only to find that individuals were able to game the software and fund bad loans. As subprime grew, eyes were taken off of the automated underwriting systems decisioning, which only exacerbated the problems of the financial crisis. “At CSC,” he continued, “we hand underwrite every loan that comes through. Because of our systems and processes, we’ve scaled far larger than our competition. In the future there may be opportunities for AI to play a role in nonprime mortgage lending, possibly in the lower-risk trenches.” Carrington Mortgage Holdings, in an interview with DS News. “They don’t go into an automated underwriting system and let the system crunch out an approval or denial of the loan. We have very highly trained individuals who look at the borrower’s whole profile for this process. That obviously includes a thorough review of their financial situation, too.” Right now nonprime activity is just a small part of the overall mortgage marketplace, but that may be changing. Tom Schopflocher and Jeremy Schneider with S&P Global Ratings explained in a December report that “because not everyone is eligible for a QM loan, some would-be homeowners have been unable to get conventional financing because they can’t or don’t provide standard documentation (e.g., W-2s) or because they have recently experienced a credit event. The demand from those who fall “These loans are manually underwritten,” said Rick Sharga, executive vice president with
outside the conventional credit box has created a niche market for lenders prepared to provide non-QM loans.” Qualified mortgages include popular products such as FHA, VA and conforming loans as well as certain portfolio mortgages. Done right, the QM lender is virtually immune to lawsuits. Done right, QMs can also include subprime financing. “The Dodd-Frank Act,” says the CFPB, “does not prohibit high-cost mortgages from receiving qualified mortgage status. While the statute imposes a points and fees limit on qualified mortgages (3 percent, generally) that effectively prohibits loans that trigger the high-cost mortgage points and fee threshold from receiving qualified mortgage status, it does not impose an annual percentage rate limit on qualified mortgages. Therefore, nothing in the statute prohibits a creditor from making a loan with a very high interest
rate such that the loan is a high-cost mortgage while still meeting the criteria for a qualified mortgage.”
“Where the consumer has an acceptable debt-to-income ratio
calculated in accordance with qualified mortgage underwriting rules,” added the CFPB, “there is no logical reason to exclude the loan from the definition of a qualified mortgage.” Even though some subprime financing can be a Qualified Mortgage, such financing often makes more sense as a non-QM product. For lenders non-QM financing can mean more flexibility and higher rates but also more liability exposure. Foreclosure Fissures The massive foreclosure glut that took place after the mortgage meltdown has become an increasingly distant memory. Measures to drive risk out of
MAY 2018 FORECLOSURE STARTS BY METRO YOY PCT CHANGE IN FORECLOSURE STARTS
-275%
-275%
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JULY 2018 | ATTOM DATA SOLUTIONS
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