Lending in the Age of the New Normal
Who doesn’t know at least one person who has tried to get a loan modification? How many of you know someone who lost his or her home through a foreclosure action? Have you ever been personally guilty of being late on a mortgage payment? Currently, there are over 44 million mortgages outstanding in the United States of America, however, since the beginning of the 2007 recession, there have been over eight million delinquencies, short sales, modifications, and foreclosures throughout the nation. Accordingly, almost 20% of those who have ever tasted the American dream now have a black mark on their credit report. In the past, a delinquency of any sort was the kiss of death; now, we operate in age of a new normal where lenders are modifying their lending criteria and mining date to find new deals in previously unconceivable places.
The Mortgage Bankers Association revealed that mortgage applications are down by 13.8 percent. The total number of homeowners refinancing is down. Adjustable mortgages are down. For banks, mortgage companies, and other institutions that make their bread and butter off of the originations of new real estate debt, this is not good news. As such, lenders of all sorts are starting to relax their guidelines to make new loans and fast. Alternative lenders like Ally have a distinct advantage in mining data and analyzing statistics, as they have troves of records of car buyers who have potential to be borrowers for real estate purposes. As the former General Motors Acceptance Corporation (GMAC) has recently found, having a database of current and past GMAC auto buyers has proved to be a gold mine. The auto industry has been on a serious upswing with sales up an average of eight-percent across all brands. Accordingly, mortgage lenders are using this data to gauge the borrowers of the new normal.
Not only are auto finance companies mining data made of gold, but the credit bureaus and ratings agencies are getting into the heat of the game to assist lenders of all sorts in finding new people to lend money to. With less weight being placed on past mortgage delinquencies, borrowers who once thought that they were dead on arrival to refinance or purchase money financing are now getting a second look. Lenders are starting to look at alternative records and devise new qualifying factors. They are now starting to look past the FICO score, and review Experian credit files, Moody reports and then make loans that would have not be made two or three years earlier. A 60-day delinquency is no longer the automatic disqualifier that it used to be. Banks are making loans to borrowers with 90-day late payments, because they can get past the FICO and see that a homeowner who normally would make their payments on time had a minor setback with an issue such as temporary unemployment.
Therefore, the game is changing. There is a silver lining for the borrower with a recent string of bad luck. People should jump at this opportunity while it exists. After watching this malaise for the last three years, an adjustment to the new normal was down right expected and necessary, as the borrower of old is pretty much dead and buried. Now, new underwriting guidelines are being set. New risk factors need to be assessed. Finally, new ways of lending money need to be employed, because this is the day and age of the new normal.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at firstname.lastname@example.org.