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Special Reports
FHA Lending
Flight to Quality Drives Loan Trends
Seeing more emphasis on FHA.
By Alton Gary Simpson
After years of loose underwriting and creative innovation in mortgage financing
products, speakers at the Product Evolution session at the Mortgage Outlook 2008 Conference here all agreed that
the subprime market implosion and the resultant credit crunch have led to a "flight to quality."
Julie St. James, senior manager, PricewaterhouseCoopers, moderated the session
that looked at the recent history of the mortgage lending arena, what products are no longer available and what
new loan products are on the horizon.
The panel of speakers included Kim Kurkowski, general manager, Wachovia Mortgage
Corp.; David Peskin, CEO, Vertical Lend Inc.; William G. Roehrenbeck, president and CEO, Arvest & Central Mortgage
Cos.; and Nina Simon, senior attorney, AARP Foundation Litigation.
Ms. St. James explained how the products that have been most implicated in the
rising default rates that have touched off the present credit crunch - interest-only and payment-option ARMs -
were originally niche products intended for financially savvy borrowers, which were then marketed to "virtually
everybody." She added that increased home appreciation rates helped mask any deficiencies in underwriting
since a borrower could always refinance out of a problem loan. When home prices stopped rising, those problems
became apparent and unleashed the crisis that is wreaking havoc in the industry today.
Ms. St. James noted that it is a regular occurrence during this phase of a market
cycle to see a movement back towards conventional mortgage products. She said that going forward in 2008, there
would be more emphasis on conforming and agency products such as those from FHA, Fannie Mae and Freddie Mac. Ms.
Kurkowski said that the creativity seen in the mortgage marketplace over the past few years was a direct result
of escalating home prices. "That mentality got some lenders in trouble," she said in an allusion to the
escalating default rates and the damage that has inflicted on lenders' earnings statements. She said that Wachovia's
approach to portfolio lending, where the goal was to fund good, quality loans that remain on the lender's books,
was characterized by reasonable LTV rates - most at 80% LTV or less, reliance on internal appraisals and the use
of live underwriters instead of automatic underwriting systems. She said that this had helped minimize the lender's
exposure to the level of defaults that others in the industry have experienced.
Nevertheless, Ms. Kurkowski stated that Wachovia would have to sell any REOs it
does have on its books into the same marketplace where lenders are already foreclosing in large numbers. "Everybody
is going to feel this," she said.
Despite the turmoil in the marketplace, Mr. Roehrenbeck did see some bright spots
in the current crisis in the mortgage market including the fact that one-third of American households are debt-free,
the average LTV in Fannie Mae's and Freddie Mac's portfolios is 50%, and that only 15% of loans have any secondary
financing at all. However, he did note that as a result of the credit crunch, interest-only products are virtually
nonexistent today.
The CEO and president of Arvest & Central Mortgage Cos. said that in the current
environment product availability and pricing isn't about whether a buyer has the ability to pay back a loan, but
is more about whether an investor is willing to fund a loan. "Suitability will be the focus going forward,"
he said.
Mr. Peskin emphasized the bright future for the reverse mortgage market. Among
the factors in this bright future are the impending waves of baby boomers reaching retirement age and the lack
of market penetration of HECM products. He said that Ginnie Mae's securitization of HECMs and the approval of LIBOR-indexed
HECM products would lead to greater innovation in product design. As an example of that innovation, he cited Vertical
Lend Inc.'s Simple60 reverse mortgage for homeowners who have reached the age of 60 - for traditional HECMs eligibility
starts at age 62. As for how the current downturn in the housing market affects the reverse mortgage business,
Mr. Peskin said that the direct result would be that seniors would have to settle for lower loan payout amounts.
Ms. Simon took the industry to task for making too many unsuitable loans noting,
"Irresponsible lending practices have been around for a while."
She said that bad loans were characterized by risk-layering and approval of exotic
loan products based on teaser rates as opposed to the reset rates.
She also noted the disproportionate impact that the increasing foreclosure rates
will have on minority communities. And while she singled out the mortgage industry for criticism, Ms. Simon also
pointed the finger at government regulators. "It's said that Wall Street is characterized by greed and fear.
In this case, there was far too much greed and not enough fear," she said, noting that fear of stronger government
enforcement could have reined in some of the more egregious lending practices.
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