Some Lenders Embrace 'New' Market

December 13, 2004
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GRAND RAPIDS — With the mortgage industry filling with new entrants and competing against rising interest rates for a shrinking market, many lenders have begun seeking out a market segment they had traditionally shunned.

"Last year when the rates were rock bottom, we had a lot of rate and term refinances going on," said Access Mortgage & Financial Corp. branch managerJeff Poppen. "Now the people we're seeing are the people with high-debt ratios and the bad credit people with the tougher cases."

Poppen explained that Access has seen a notable increase in business this year through a combination of effective marketing and an increased exposure to the subprime and nonconforming markets.

"I don't think there has been a saturation level of the rate and term refinancing, but a lot of our business lately is coming from those (bad credit) areas," he said. "What is really happening is brokers have started to pay more attention to the people with the tougher deals; they are starting to wake up to these types of borrowers that have bad credit."

In previous years, Poppen said, no more than 40 percent of his company's business had been of a subprime or noncomforming nature, but this year he expects it to represent as much as 70 percent.

"When you lose 60 percent of your business, you have to try something new," said Scott Jongsma, assistant vice president of residential mortgages for National City Bank. "So everybody is geared up. In addition to that, it's now much easier, so we now have an opportunity to lend to these people that we didn't have before.

"And to be honest, some mortgage companies used to specialize in the subprime area and we didn't take the time or energy to do that," Jongsma acknowledged. "There was more than enough business in the 'A' paper. There were a lot of clients we couldn't help and we would refer them to someone else."

Jongsma explained that lenders are welcoming loans that only a few years ago would have been impossible to close. In addition to that, advances in the technology tools used by the industry allow brokers to better serve special cases.

"The industry is making accommodations for this type of lending," said David Bird, president of Heartwell Mortgage Corp. "Even in the conforming market we're seeing a little more flexibility on the part of investors."

Bird estimates Heartwell has seen a 15 percent increase in nonconforming loans this year.

"This market has gone untapped in the conforming world, but I think with credit scoring, investors and lenders are better able to quantify the risks and are able to lend in accordance to that."

Jongsma noted that much of the trend may be due to an adjustment of the mortgage industry to what he believes is a nationwide weakening of consumers' credit.

"In general, from what I've seen, people's credit has deteriorated over the past few years," he said. "It's just the pressures of society. Everyone wants a new car … there is constant pressure to buy this and buy that."

Steven Vanderwey, owner of Cornerstone Home Loans, doesn't see this as a reason to enter the nonconforming market; rather, he sees it as a reason to continue to stay out.

"The nonconforming environment is growing," he said. "But I think it's growing from some folks' desperation to delay a difficult problem they are in with their credit for five or six months. There are unique situations where nonconforming loans are the right scenario, but if someone needs a nonconforming loan to buy a house, maybe they should delay buying the house until they solve their credit concerns.

"The thought that if the lenders are willing to say yes then it's OK is not true," he added. "There are a lot of people getting these loans who I wish would just stop spending money."

While Jongsma and Poppen both agree that the industry is now ripe with predatory lenders hoping to capitalize on the desperate people, they believe that nonconforming loans can provide a solution for many in difficult financial situations, while also providing options for those with stable finances but bad credit.

At Access, Poppen has used this to generate a large amount of repeat business. He explained that customers first seek help out of a bad financial situation through a consolidation of debts. Six months later, many return with a higher credit score to refinance into a conforming loan.

He added that recent changes in Michigan law to curb predatory lending, limiting prepaid penalties to no more than 1 percent, has made the quick turnarounds easier to accomplish.      


Overview Of Credit Use, Debt

Here are the average credit scores and related values for the United States, East North Central Region (Michigan, Illinois, Indiana, Ohio and Wisconsin), Michigan and Grand Rapids. Credit usage refers to the amount of available credit the average individual has used, and accounts overdue is number of accounts per person, on average.

United States

 Region

 Michigan

 Grand Rapids

Credit Score

678

684

679

679

Debt
(excluding mortgage)

$11,088

$10,747

$11,065

$10,188

Credit Usage

24.5%

23.7%

23.7%

23.4%

Accounts Overdue

0.84

0.9

0.99

1.17

Note: South Dakota boasts the best credit of any state, with an average score of 710. No state has worse credit than Texas, with an average score of 651.

Source: Experian National Score Index, www.nationalscoreindex.com

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