| Subprime Loans Cost More to Originate, Service
Subprime conference speakers discuss maturity of market May 24, 2004 By NEIL J. MORSE |
| If lawmakers and regulators would stop interfering with the mortgage lending process, the free markets would sort out right from wrong and winners from losers.
That is the view of Doug Duncan, chief economist, Mortgage Bankers Association, who says the legislators who think unprotected consumers are being “gouged,” especially in the nonprime sector, simply do not understand how markets operate. Speaking at a subprime conference sponsored by the MBA in Washington, D.C. earlier this month, Duncan said this higher risk sector is “a very new market” that was born only a decade ago in the aftermath of the 1993 refinance boom, which ended in ’94. “All that excess capacity built in 1992 and ’93 was looking for a home,” he said. “There was a whole group of borrowers out there [seeking mortgages] and spreads became very wide. A lot of people rushed into that business,” Duncan recounted. The subprime market reached “puberty” in 1998, the MBA official said “and that began the rationalization for the nonprime market,” as we know it today, said Duncan. Today, he noted, that market is “in its second year of college, in terms of maturity.” Investors will continue to put their capital at risk in subprime, Duncan said, but they want to know how they will recapture that money. It requires extensive data — “a time consuming process,” he said. (MBA plans to issue a report comparing prime and nonprime market performance in the next week or so). One finding, thus far, is that loan officers in the prime market are six times more productive, and the cost of servicing a nonprime loan is four times what it is in the prime market, according to Duncan. Connecting political and market forces, the economist said legislative attempts to restrict lending, state-by-state and sometimes city-by-city, drives firms from the nonprime market. It will also serve to “widen risk-adjusted spreads,” he predicts. Duncan says lawmakers should have “a conversation about the functioning of markets and how they operate,” primarily because more legislation introduces uncertainty into markets, which increases risk. Then, volume declines, resulting in less information on performance, making investors less willing to put capital at risk, further reducing information and (ultimately) lending. For now, there is no shortage of lenders who want to get into the subprime market, according to conference speakers. Dave Farrell, senior vice president, Countrywide Financial Corp., West Hills, Calif., said “we continue to get daily calls from people asking how they can switch into the B/C arena.” He said: “We see only blue skies ahead [and we’re] excited about the next several years. It appears to be a ‘perfect storm’. The time has never been better for subprime.” |
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Neil J. Morse is a communications consultant and independent writer working exclusively in the mortgage finance industry. He resides in Newtown, Conn. and may be reached by e-mail at:Â morse@ntplx.net |
