wlm4 at cornell.edu (Will
01-01-1995, 02:39 AM
WHAT CAN CDFIs DO TO IMPROVE THE MORTGAGE LENDING SITUATION? A LOW INCOME
BORROWER UNDERWRITING PROPOSAL.
What we are looking for in our mortgage loans is repayment and minimizing
the risk to the CDFI. We have developed a theoretical framework of low
income lending. It's not magic.
One examiner questioned, how can we outguess combined wisdom of the national
secondary market? I started to ask if this combined wisdom is also
responsible for S&L crisis. But I didn't say that. Our answer is simple:
we can't outguess the national markets. All we do know, and we know it
better than anyone else, is what is happening in our own backyard. Yes, we
can carve out a market that is better for us than the national market, right
in our backyard.
We are not talking about liberalizing secondary market standards. In some
areas we are stricter.
- Five years ago the most popular loan was a 30% down payment loan that did
not require standard income and credit documentation, called a Low Doc. We
did not participate in these LOW doc mortgage debacles, which were a recipe
for fraud.
- Another loser was the GPM or Graduated Payment Loan, which allowed greatly
reduced payments in early years, in effect interest only or less in trade
for steeply rising payments in later years. When rising employment
expectations proved unrealistic, these mortgages went into default, en masse.
- We have required certified Appraisers from the beginning; no in house
appraisers with drive by appraisals. Each of the programs named has been
accepted by the secondary market and has caused losses.
We have developed a multi level program. We use the secondary market for
the majority of our mortgage loans. We then design mortgage programs to
fill in market niches which we see in our community. Can an individual
CDFI develop standards that are better for the community and CDFI than
national market standards? We have incorporated flexibilty into our loans
specifically for people who have credit blemishes, for people who don't have
sufficient downpayments, for owner built homes, for energy efficient home
construction, for homes in need of repairs.
I'll end by giving an example of a great type of protected markets we
identified: Starter Houses.
- Starter houses maintain their value. We may have assumed that down
payments of 20% were necessary across housing prices. But starter houses
are a less volatile section of market.
- The value of starter houses is maintained better than luxury homes. We
say that starter houses are all shelter value, which never depreciates
because shelter is always needed. Luxury homes include in their price both
a shelter value and a luxury value. In our county, since the Board of
Realtors has kept records in the 50s, the value of the bottom 20% of houses
has never lost value during any single year. By contrast, the top 40% has
lost value seven times.
- Starter house borrowers tend to provide the CDFI with liquidity and
pricing opportunities when the borrowers move up to larger houses. We have
been successful with 3-7 year balloon notes.
- Low dollar amount. Our risk with each loan is smaller, our dollars go
further, and we help out a target population.
- Low default rate. The lowest delinquency rates are in Single Family owner
occupied properties. (95% of RTC properties are commercial). DQ in 1988
was 15% for land and construction, 8% on multifamily, 1.6 of single family.
Our experience is that when we help people who couldn't get a mortgage on
the secondary market, they return loyalty. Our flexible mortgage program, 3
years old, has not had one single late payment.
- Repeat borrowing. One characteristic of starter house lending is that
borrowers will be back when they want a larger house. We try to build
credit for our borrower so they will be financed by the secondaries within
five years.
WHO ARE WE?
Our CDFI has been a participant in the secondary market for eight years,
selling up to $8 million in loans annually. For these sales, we collected
up to $90,000 a year in fees, with less than half that amount in direct
expenses. This is one of our most consistently profitable products. We
have provided 500 members with their own houses.
The Secondary Market can be thought of as an organization of investors who
pay our CDFI for finding and qualifying members who want to buy (or
refinance) houses. We have a "license" to lend the investor's money to our
members. But here's the rub: we have to follow the investor's rules.
Mortgages we sell are gathered by underwriters into million dollar pools
containing loans from all over the country and the "securitized" package of
loans is sold as a commodity. All the loans must be similar: investors want
a uniform product. There are strict standards a loan must meet to qualify
for sale on the secondary market. The enforcers of standards are the quasi-
government corporations - FNMA, GNMA, FHLMC (Fannie Mae, Ginnie Mae, Freddie
Mac).
Our loan officers are well trained with certifications from four
underwriters (we don't sell directly to national markets). These same loan
officers also prepare loans for our portfolio. The staff must be familiar
with secondary requirements and why those standards were established to be
able to make informed decisions for in- house lending. We find that the
secondary market is invaluable for establishing:
- Debt ratios
- Loan to Value ratios
- Verification standards
- Documentation standards
- Insurance, Title, Abstract, Appraisal standards
- Forms: Applications, Closing, Disclosures
- Loan Officer training
************************************************** **********
William Myers
Alternatives Federal Credit Union
301 West State Street, Ithaca, NY 14850-5431
Voice (607) 273-3582 ext 817 FAX 277-6391
E-Mail Alternatives-Myers@Cornell.edu
************************************************** **********
This post transferred from the cdb-l mailing list
BORROWER UNDERWRITING PROPOSAL.
What we are looking for in our mortgage loans is repayment and minimizing
the risk to the CDFI. We have developed a theoretical framework of low
income lending. It's not magic.
One examiner questioned, how can we outguess combined wisdom of the national
secondary market? I started to ask if this combined wisdom is also
responsible for S&L crisis. But I didn't say that. Our answer is simple:
we can't outguess the national markets. All we do know, and we know it
better than anyone else, is what is happening in our own backyard. Yes, we
can carve out a market that is better for us than the national market, right
in our backyard.
We are not talking about liberalizing secondary market standards. In some
areas we are stricter.
- Five years ago the most popular loan was a 30% down payment loan that did
not require standard income and credit documentation, called a Low Doc. We
did not participate in these LOW doc mortgage debacles, which were a recipe
for fraud.
- Another loser was the GPM or Graduated Payment Loan, which allowed greatly
reduced payments in early years, in effect interest only or less in trade
for steeply rising payments in later years. When rising employment
expectations proved unrealistic, these mortgages went into default, en masse.
- We have required certified Appraisers from the beginning; no in house
appraisers with drive by appraisals. Each of the programs named has been
accepted by the secondary market and has caused losses.
We have developed a multi level program. We use the secondary market for
the majority of our mortgage loans. We then design mortgage programs to
fill in market niches which we see in our community. Can an individual
CDFI develop standards that are better for the community and CDFI than
national market standards? We have incorporated flexibilty into our loans
specifically for people who have credit blemishes, for people who don't have
sufficient downpayments, for owner built homes, for energy efficient home
construction, for homes in need of repairs.
I'll end by giving an example of a great type of protected markets we
identified: Starter Houses.
- Starter houses maintain their value. We may have assumed that down
payments of 20% were necessary across housing prices. But starter houses
are a less volatile section of market.
- The value of starter houses is maintained better than luxury homes. We
say that starter houses are all shelter value, which never depreciates
because shelter is always needed. Luxury homes include in their price both
a shelter value and a luxury value. In our county, since the Board of
Realtors has kept records in the 50s, the value of the bottom 20% of houses
has never lost value during any single year. By contrast, the top 40% has
lost value seven times.
- Starter house borrowers tend to provide the CDFI with liquidity and
pricing opportunities when the borrowers move up to larger houses. We have
been successful with 3-7 year balloon notes.
- Low dollar amount. Our risk with each loan is smaller, our dollars go
further, and we help out a target population.
- Low default rate. The lowest delinquency rates are in Single Family owner
occupied properties. (95% of RTC properties are commercial). DQ in 1988
was 15% for land and construction, 8% on multifamily, 1.6 of single family.
Our experience is that when we help people who couldn't get a mortgage on
the secondary market, they return loyalty. Our flexible mortgage program, 3
years old, has not had one single late payment.
- Repeat borrowing. One characteristic of starter house lending is that
borrowers will be back when they want a larger house. We try to build
credit for our borrower so they will be financed by the secondaries within
five years.
WHO ARE WE?
Our CDFI has been a participant in the secondary market for eight years,
selling up to $8 million in loans annually. For these sales, we collected
up to $90,000 a year in fees, with less than half that amount in direct
expenses. This is one of our most consistently profitable products. We
have provided 500 members with their own houses.
The Secondary Market can be thought of as an organization of investors who
pay our CDFI for finding and qualifying members who want to buy (or
refinance) houses. We have a "license" to lend the investor's money to our
members. But here's the rub: we have to follow the investor's rules.
Mortgages we sell are gathered by underwriters into million dollar pools
containing loans from all over the country and the "securitized" package of
loans is sold as a commodity. All the loans must be similar: investors want
a uniform product. There are strict standards a loan must meet to qualify
for sale on the secondary market. The enforcers of standards are the quasi-
government corporations - FNMA, GNMA, FHLMC (Fannie Mae, Ginnie Mae, Freddie
Mac).
Our loan officers are well trained with certifications from four
underwriters (we don't sell directly to national markets). These same loan
officers also prepare loans for our portfolio. The staff must be familiar
with secondary requirements and why those standards were established to be
able to make informed decisions for in- house lending. We find that the
secondary market is invaluable for establishing:
- Debt ratios
- Loan to Value ratios
- Verification standards
- Documentation standards
- Insurance, Title, Abstract, Appraisal standards
- Forms: Applications, Closing, Disclosures
- Loan Officer training
************************************************** **********
William Myers
Alternatives Federal Credit Union
301 West State Street, Ithaca, NY 14850-5431
Voice (607) 273-3582 ext 817 FAX 277-6391
E-Mail Alternatives-Myers@Cornell.edu
************************************************** **********
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