Over the past couple of years, mortgage lenders and originators saw more business come in the door than they could handle, due in large part to historically low interest rates. As rates have increased, however, lenders are looking to regain lost market share.
One company with a unique perspective in this market is ICE Mortgage Technology. The company’s flagship product, the Encompass loan origination system, is widely used in the mortgage industry, said Parvesh Sahi, ICE’s senior vice president of business and client development.
“We’re in a world where there are going to be some big winners — not only in the mortgage lending space, but also the technology space — and there’s going to be some losers, too,” Sahi said. “The big winners are going to pivot to provide alternative lending products. And they’re going to use technology to leapfrog ahead.”
Sahi spoke to Scotsman Guide about two of these alternative products. One is home equity lines of credit (HELOCs) while the other is nonqualified mortgages (non-QM), or loans that don’t meet federal standards to be purchased by the government-sponsored enterprises.
What are you hearing in the marketplace?
Refis are getting reduced pretty dramatically for rate-and-term (loans) and it’s very quickly shifted to a purchase market. Lenders are having to kind of react to find alternative lending products. Because of the footprint that we have in the industry, representing about 50% of originations (through Encompass), we have a significant sample size, and we actually see it encroaching upon a 70-30 split, where it’s about 70% purchase versus 30% refi.
Lenders are now competing with essentially unsecured loans. Lenders need to have their back-end underwriting processes ticked and tied.
Why is that?
The reality is a large share of folks that were looking for refinances have refinanced in the 2s and the 3s. With interest rates going up, lenders aren’t going to really have the opportunity to reengage those consumers on a rate-and-term refinance for probably some time.
What type of alternative lending products can make up for the loss of volume?
HELOCs and non-QM loans are those alternative lending products that lenders are looking at to make up for that loss of volume. Consumers really want to be able to access their equity. They prefer not to do a cash-out refi, because that’ll mess up their 2% and 3% interest rate mortgages. They really want to do that second (mortgage) where they add on a HELOC and get the cash that they need for things like home improvements.
Let’s talk about the non-QM market. What’s fueling that?
Non-QM introduces a new market to the lender where they can expand the credit box. Because interest rates are trickling up, the private capital market is starting to dip their toe back in the water because it becomes a little bit more interesting in terms of their rate of return. Their return is going to be better.
What does that mean for originators?
It actually opens up more of that market for originators to have legitimate products for consumers. Consumers that were underserved previously are now able to get served and lenders are in a place to offer those products because they have a liquidity on the back end.
What can mortgage originators do to meet these needs?
As far as HELOCs, it’s a different origination process. There’s different documentation that goes along with it. To process those loans, lending shops have to make some changes to their technology.
Lenders are now competing with essentially unsecured loans. Lenders need to have their back-end underwriting processes ticked and tied. Then they need to create that front-end experience all the way through processing so that a consumer can get a HELOC just as easily as an unsecured loan. Those are the tricks of the trade that come through technology partnerships.
Is there anything mortgage originators should do to market non-QM lending?
There’s a balance on that side. You don’t want to market to communities where you’re not going to approve, but then at the same time you want to expand that credit box and provide the underserved market the ability to come in and get a new loan. ●
