Sep. 23: IMBs using debt for financing; appraisers & a lack of comps; thoughts on credit and credit repair; pencils: a growth industry?

The world is full of trivia. Did you know that Abraham Lincoln is the only U.S. President to receive a patent? That Thomas Edison didn’t actually invent the light bulb (but did make it commercially viable)? Is there mortgage trivia? Sure. Unfortunately talk of 8 percent mortgage rates have crept into conversations. The last time 30-year mortgage rates were in the 8s was 23 years ago. (KB Home, for one, states that despite higher rates it is not relying on buydown programs to help its home buyers finance their purchase.) How about some pencil trivia, as they’re bucking the tech wave. Ignite’s Brad Ketcher points out that, “Pencils and similar writing tools have grown by 17 percent over the last 15 years, to a whopping 3.7 billion units annually. That’s a lot of pencils, proving that not all things are being replaced by the digital age.” What’s the reason for the increase? Pencils continue to be the essential, easy-to-use writing tool for grade schoolers, especially from the kindergarten level up to fourth grade, and there are a lot of kids out and about needing to learn how to write!

Thoughts on credit, and credit repair, along with a primer

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According to the National Association of Realtors (NAR), 51% of all student loan holders say their debt delayed them from purchasing a home. “Don’t let student loan debt keep your borrowers from homeownership. Homeownership is within reach, even with student loan debt. Find out how you can help your borrower, read the Certified Credit Article.”

Last Saturday’s Commentary had this:

“The CFPB has been very litigious against credit repair companies for all sorts of violations. And the CFPB has been getting some hefty settlements. Lenders Compliance Group recently wrote about dangers of credit repair. Generally, credit repair organizations sell, provide, or perform any service in return for the payment of money or other valuable consideration for the express (or implied) purpose of improving a consumer’s credit record, credit history, or credit rating or providing advice or assistance to a consumer with respect to any such activity or service. Consumers should know some caveats in evaluating credit counselors. Red flags include the credit repair organization demanding payment upfront before it provides any services, the organization telling consumers it can get rid of the negative credit information in the credit report in a short period, the organization representative can’t explain the specifics of the services they are offering or the total cost for those services, the organization doesn’t inform consumers of their rights, and the organization asks consumers to misrepresent information.”

The compliance warning prompted Russ Anderson to write, “Interestingly, your credit repair ‘signs of danger’ sounds very similar to the process of hiring an attorney, whose outcome is as equally unknown as credit repair. The entire credit industry is stacked against the consumer and touting the ‘dangers of credit repair’ doesn’t help that cause. Literally, everyone in the credit industry benefits from bad and misreported credit… except the consumer! That includes the bureaus themselves, which actually make money every time someone disputes their credit report. Jumping on the pile along with the bureaus, the credit industry, the government agencies that purport to ‘defend the consumer’ (how ‘1984’ is that?), and the businesses that benefit through higher interest rates because of low credit scores is hardly beneficial to the improvement of the system.

“Are there bad actors? Of course. There are bad actors in every industry. Does the ‘government’ catch them in the act? Absolutely not. They usually crack down on exactly the wrong basis and at the wrong time, which is typical of all bureaucrats who understand absolutely nothing about the industry they purport to regulate. From my vantage point for well over a decade, the credit repair industry has a lot of good people in it who are really trying to help others.

“Accepting a report like this, at face value, is a mistake. They really don’t know the ‘rest of the story.’ I’m working on a strategy with Sun West to include an element of credit repair for consumers directly within Angel AI which hopefully won’t cost the consumer anything. There are just some hard costs associated with repair (credit monitoring, which by the way mostly benefits the bureaus) that you can’t get around for correcting someone’s credit. But the dispute process itself will not cost the consumer.

“Mostly, I want to use the platform to help consumers do it right. Disputing within the bureau’s online system is usually the first mistake they make. They give up a ton of rights by following that path, and they will get nowhere.” Thank you, Russ.

Lenders and loan officers know that underwriters make decisions on borrowers without ever seeing them in-person, but rather based on the paperwork submitted in the loan application. The process to determine if a potential borrower is qualified for a loan includes pulling credit reports, ordering an appraisal, verifying income, employment, and assets, and double-checking the source of down payment funds, among other things. About one out of every 12 applications for single-family homes are rejected historically, but that number fluctuates depending on lending conditions, or loosening and tightening of credit conditions.

Some common reasons loans will be rejected are issues with credit history and score, a DTI ratio including all debt obligations, plus the mortgage amount against monthly gross income that is above 43 percent (putting it into the non-QM status), a shaky job history that shows getting laid off or recent job changes, no detail of paper trail (W-2s, pay stubs, asset statements, etc.), an appraisal that comes in low, or problems with a home inspection. Additionally, a borrower’s income sources matter in the sense of how much is commissions and bonuses versus a regular salary. In the event of rejection, borrowers can work on fixing the issue. Some common fixes include improving one’s credit, paying off debt, increasing savings, or choosing a different property.

Lenders use credit reports because they are arguably the best indicator of the likelihood of repayment by a borrower. And things are changing from a tri-merge to a bi-merge. Every mortgage professional should know the following terms that show up on credit reports. The credit score represents the overall likelihood a consumer will pay their debts. A tradeline is each separate credit account. A revolving account does not have a fixed number of payments (e.g., credit cards), whereas installment credit (e.g., mortgages) involves a set number of scheduled payments over time. Utilization is a term used to describe the percentage of currently outstanding debt against the credit limit.

Lenders have been examining hard pulls versus soft pulls in 2023 as the cost of running credit reports has gone up. A hard inquiry (or “hard pull”) can hurt the overall credit score versus a soft inquiry (“soft pull”) where the potential borrower did not specifically apply for the offer, not impacting credit scores. Disputes can suspend the mortgage application process until a final dispute resolution is reported.

LOs may be concerned when they see the term “original creditor” as it means an account has been turned over to a collection agency or sold to a debt buyer. If there are serious delinquencies or late payments on accounts such as bankruptcy or foreclosure, these count as derogatory marks. FCRA stands for Fair Credit Reporting Act, which ensures that consumers know their rights and that lenders understand regulatory and compliance responsibilities. Finally, the comments section does not allow for explicit negative impacts or derogatory marks, but you can identify comments such as “payment date not reported” or “deferred.”

Underwriting has not loosened up for self-employed borrowers. Prior to the pandemic, the underwriting guidelines for self-employed borrowers were either one or two years of personal and business tax returns (if applicable) depending on length of self-employment.

During the pandemic, guidelines on self-employed borrowers tightened up due to the number of businesses that were negatively impacted either by having to close due to government regulations, or through lost business and declining revenue. Despite many businesses returning to full operations after the pandemic, many guidelines put in place require not only the tax returns but also a year-to-date profit and loss, plus bank statements for the prior three to six months for the business to show the income was in line with the profit and loss revenues. These guidelines also apply for applicants who own investment property and the net income from those properties are needed for qualifying.

Appraisers: can’t catch a break

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The question has been raised recently, since inventory is so limited, are appraisers saying that recent comps are very hard to come by? For an answer I turned to Mike Simmons, Co-President of AXIS AMC. “In a word, yes, inventory matters. As the volume of transactions diminish, appraisers find the limited amount of data … challenging. Pare that with the specter of rising prices in many markets (note I didn’t say values) and the appraiser’s job becomes even more difficult. This is the classic example of supply and demand being, and here I’ll use a technical term, out-of-wack.

“And now we’re about to slip into the winter months with historically fewer sales and rates higher than anything we’ve experienced in decades. This will only add to borrower, lender, and appraiser challenges.

“Remember too that the appraiser’s client is really the lender. I should say at this point that an appraiser is trained to be agnostic. They are guided only by the data and their experience. For the most part, the appraiser never even knows the loan scenario or financing terms. It’s not relevant to their report. A borrower’s decision to buy may be driven by need or want, but the lender’s decision to lend is bounded by value and their perception of risk.

“In the old days (whatever those are), the appraiser would simply look back in time for sales, broaden their market area, and make larger and more problematic adjustments to bring forward an opinion of value. In the hands of an experienced, local appraiser, that can still be a valid path. But the GSEs have access to ALL the data and are more vigilant than ever at ensuring that appraisers explain and support the adjustments they’re making in today’s markets.

“Appraisers can navigate through today’s markets, but the challenges are not without increased levels of difficulty and heightened risk.” Thank you, Mike!

IMBs and issuing debt

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Chris Whalen writes, “Every IMB that can, should be raising term debt. Even mid-teens is just fine for IMBs, which can make a lot of money with that capital in a ‘down rate’ environment. PFSI was out with another secured deal as well.

Eric Hagen at BTIG Research & Strategy wrote, ‘Freedom Mortgage (Private) issued $1.3 billion of debt last week in two tranches in a strongly over-subscribed deal… The first tranche is $800 million due 10/1/28 with a 12% coupon, and the second tranche is $500 million due 10/1/30 with a 12.25% coupon. Both notes were issued at a two-point discount. The use of funds is retiring about $1 billion of unsecured debt maturing between 2024 and 2025.

“’Although mortgage rates are currently at or near fresh highs, we’ve seen Freedom’s debt trade at wider spreads when interest rate volatility has been higher, as well as on the back of regulatory changes like Ginnie Mae’s proposed capital requirements last year. Yields for its debt still look relatively wide versus the Bloomberg High Yield Index, which is currently marked to an 8.5% yield, and PFSI and COOP’s debt due 2031 with an 8.0-8.5%.’

Chris’s note went on. “The key point about Stan and Freedom is that he put down term debt years ago, it tightened to +800 over Treasuries, and now widened out to low teens, which I’d argue is the natural cost of capital for an IMB.

“More importantly, Stan created a following among banks and funds that buy his debt. Freedom, COOP, PFSI and others with significant servicing assets are the IMB models that GNMA and FHFA ought to support. The model for the future is a few large IMBs with big MSRs that raise term debt in the capital markets to diversify from bank lines. No coincidence that bank regulators want term debt in bank units too. Smart mortgage bankers use the more predictable duration of term debt against LT MSR book, while they can fund production with banks and repo lines.

“Think about how valuable those low-coupon GNMA MSRs inside Freedom, COOP, PFSI, Lakeview, Carrington, Planet, et al will be after a couple of years of $1.5T to $2T production. The asset gatherers that can acquire, finance, and retain legacy MSRs will win, but those that sell the loan and servicing not so much. As an old banker reminds me, MSRs only have value if you can finance them in all markets.” Thank you, Chris.

You don’t want to return to the office? Here’s what you’d miss out on: parkour!

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