Originators Ignoring Profitable Niche

Based on analysis of over 29 million residential properties sold over the past 50 years in more than 700 countries, the study, recently released and announced by First American Real Estate Solutions, reveals “lending opportunities in the current mortgage marketplace that would provide an entire sector of consumers with benefits currently unavailable to them.”

According to the Equity Lending to Tomorrow’s Borrowers: New Opportunities and New Solutions study, about 45 percent of all the properties sold have been within the past five years. Lending is often concentrated in markets that have experienced strong price appreciation over the last few years and much of it has been unconventional with many recent borrowers likely to be “at or near the edge of their financial capabilities.”

“The great acceleration of lending, the use of unconventional mortgage products, the frequency of refinancing, and the elevated level of attention have focused upon the…group of recent purchasers” said the study’s author Christopher Cagan. But the group that “now constitutes the greatest lending opportunity in the nation,” has “been largely ignored.”

Cagan refers to the ignored group as “Tomorrow’s Borrowers” — borrowers that have owned their residences for six years or more and hold most of the $7 trillion in home equity in America. According to the study, 54.7 percent of homeowners have held their residences since 1999 or earlier, and about 15% of these have held their residences for fifteen years or more.

“These homeowners are likely to hold substantial equity, due primarily to strong appreciation of values and secondarily to the paying down of their initial loan balances,” he added. “These long-term homeowners are likely to be older than new buyers. They are likely to have a stable income and a reasonable to high credit score. They constitute the largest mortgage lending opportunity today.”

Despite holding significant equity in their homes, many of these homeowners could be categorized as nonconforming or subprime borrowers because they have low or declining incomes. Lenders can attract these consumers by offering new mortgage products in which they “could enjoy financial advantages similar to those that are typically offered to prime borrowers,” according to the announcement.

“The study suggests that in the next three to five years, lenders will introduce innovative products that will meet the unique needs of Tomorrow’s Borrowers by providing them with financial advantages beyond what they presently enjoy,” the Anaheim, Calif.-based firm said.

Cagan anticipates advances in reverse mortgage lending with products such as an inflation-protected reverse mortgage that insulate retirement income from erosion through inflation by having monthly payments to the borrower automatically rise with inflation, and having a similar raise in the credit limit available. Another option could be a single-payment reverse mortgage combined with the purchase of life-stage-related products such as insurance, often at discounts obtained through working with strategic partner firms and the formation of buyer groups.

The author also anticipates that favorable interest rates and loan terms will be made possible by advanced analytics or products endowed with market intelligence, such as improved fraud and foreclosure diagnostics, that will enable lenders and ratings agencies to more accurately assess risk.