The new Cornerstone Mortgage Office at 31 Bridge St. in Salem is prepared to increase its subprime lending business as an answer to industry-wide changes.
The traditional mortgage and refinance markets have become increasingly more competitive as rates have risen and the customer base has shrunk. Lenders can no longer afford to sit around waiting for the phones to start ringing off the hook the way they did during the refinance boom. Many lenders are turning to niche markets as a way to survive the new lending climate, and industry experts say they are seeing a rise in popularity of nontraditional mortgage products.
The need to attract new mortgage business means companies are expected to seek out new products. Some mortgage companies are entering or increasing their presence in the subprime mortgage market. Other lenders are exploring exotic mortgages and even reverse mortgages.
“It became clear that the market was shifting away from refinance,” said James Dougherty, executive director of the Massachusetts Mortgage Association. He noted that the purchase market also started to decline, leaving lenders looking for new opportunities. “When the community of lenders began to sense this, they scrambled,” Dougherty said.
“There is a general wave of interest in what are considered nontraditional and exotic mortgages,” said Jim Jones, president of First Wellesley Consulting Group. “The principle reason for that is the decline in mortgage originations. Not only is it a drop in volume, what is happening is just the realities of the market.”
Michael Meyer, president of Waltham-based Cornerstone Mortgage, said his 20-year-old company has offered subprime loans in the past but is prepared to increase that portion of the business now that the nature of the industry has changed. He said he believes 80 percent of the company’s business will be in the subprime market this year, where in the past it was about half. In part, that is because the pool of available customers is changing and so companies need to adjust their business strategy to stay afloat, he said. Meyer added that it also has to do with the type of customers seeking loans.
“Where rates have been low for so long, anyone who hasn’t refinanced at least once if not twice, there has to be something wrong with them – and it’s probably their credit,” he said.
Subprime loans, intended for people with poor or limited credit, carry higher interest rates and have been linked to predatory lending. However, when used properly they can be a great tool in assisting people to buy homes, Meyer noted. He said for some people, subprime loans are the only feasible option.
“The predatory lending law got rid of some of the crooks, but it’s a double-edged sword,” said Meyer, who added that the strictness of the Massachusetts law can prevent some people from obtaining a loan option that would be beneficial. “These loans are to get people back on their feet.”
Meyer said he believes the subprime market is destined to become more competitive, but it will mostly be mortgage companies competing against other mortgage companies and not their other counterpart banks.
‘Completely Different’
Dougherty said there is definitely increased interest in the subprime market. He added that some lenders who have specialized in those mortgages are feeling new competition as more companies invade their niche.
However, stringent regulations and guidelines to follow and tighter scrutiny by regulators will have some mortgage professionals passing on that option, said Dougherty.
“When you get into subprime [loans], you are getting into a whole host of new regulations,” he said. “You have to be careful not to put people in them who shouldn’t be in them.”
Added Jones, “I think some lenders will be deterred from subprime lending because of increased regulatory scrutiny.”
Arlington-based Leader Bank and Leader Mortgage don’t go near subprime loans and are not planning to do so. Sushil Tuli, president and chief executive officer of Leader Bank and owner of Leader Mortgage, said most banks tend to shy away from the subprime products due to the added regulatory burden and the reputation risk. He said his institution has a longstanding history of working in the primary market and is not prepared to make the switch, but acknowledged bankers are warming up to the idea of non-traditional products.
Tuli said he knew it was time to add more mortgage options when interest rates were due to rise and the customers who only opted for traditional mortgages were becoming fewer. Last year, Leader introduced interest-only mortgages among a few other products labeled as risky by the Fed and other regulators. But borrowers still want those types of home loans.
“More and more people call and say they want interest-only [loans],” noted Tuli. “More and more lenders are doing interest-only loans and it surely will become more competitive. The market demanded it, and we didn’t want to lose our business to the competitors.”
Tuli said about 15 percent to 20 percent of his mortgage business comes from non-traditional loans. Last year it was less than 10 percent, he said.
Do lenders have to consider new products? “I think that the answer is yes. They have to keep up with what their customers want and what the market provides,” said Jones. “When you talk about non-traditional [mortgage products], you have to sort of break them out – subprime, exotic, reverse mortgages.”
George Downey, founder of Harbor Mortgage Solutions in Braintree – who as a member of Banker & Tradesman’s Advisory Board has written several columns on the topic of reverse mortgages – said he is glad he got into the reverse mortgage industry when he did. He said while many mortgage companies may be testing the water, he already knows the ins and outs of the business.
“We’re a boutique,” he said of his company, which counts reverse mortgages as two-thirds of its business.
But Downey knows his niche market is attracting more lenders due to changes in the industry.
“We are seeing new players come into it all the time. You are seeing more lenders and more brokers interested in the product,” he said. “The reverse mortgage program is very different. It is a completely different business. The people that get into the business need to understand that.”
A reverse mortgage is a loan against a home that the senior homeowner does not have to pay back until he or she leaves the house. It allows some seniors to stay in their homes for the rest of their lives.
The first reverse mortgages were offered about 20 years ago, noted Downey. He said they have become more popular in recent years and his company has been providing them for four years.
“As more people are drawn to it, it is important that they do it right. You have people coming into it because they are trying to make next month’s rent. This is not the answer to that,” said Downey. “The reverse mortgage business is there for very different reasons.”
Reverse mortgages cost the lender four to five times as much to originate. It also takes longer to close them, usually one to three months, since it is required by law that the lender meets with the reverse mortgage applicant face-to-face every time, said Downey.
Downey said he has a separate staff to handle reverse mortgages. He said typically loan originators do not fully understand the product and it is too different from the mortgage business they are used to for them to carry it out properly.
“You don’t sell reverse mortgages – you educate people. You don’t close 100 percent of these,” he said. “The truth is, nobody wants a reverse mortgage, and I mean nobody. What they want is a solution to their problems.”
Dougherty said over the years, he has noticed lenders taking more interest in offering reverse mortgages. The Massachusetts Mortgage Association has been holding educational seminars on reverse mortgages for years, but it is only now that many in the lending industry are looking to incorporate it into their business.
“We saw a huge increase in the number of people,” Dougherty said, adding that it is a strong indication Bay State lenders are looking for new avenues to pursue.
