One out of three Americans worries that rising monthly payments, especially property taxes and energy costs, will force him to sell his home and buy a less expensive one, according to the fourth annual National Housing Opportunity Pulse, a survey released by the National Association of Realtors (NAR).

The survey also found that by a two to one margin, Americans believe that high monthly payments, rather than high down payments, are the greatest obstacle to buying a home. Rising property taxes are the leading concern associated with owning a home (34 percent), followed by increasing electrical, fuel and other energy costs (28 percent). Only 14 percent said rising mortgage interest rates would keep them from becoming homeowners.

Its clear America is facing a crisis in housing opportunities, with nearly two-thirds of families concerned about being able to find a home they both like and can afford, said Thomas M. Stevens, 2006 NAR president and senior vice president of NRT Inc. Many families are struggling to meet the high cost of homeownership, and increasingly, those costs are property taxes and energy utilities.

In 2003, the average monthly mortgage principal and interest payment was $840. In 2005, families were paying 23.8 percent more, or $1,040, monthly. In the past year alone, the average monthly mortgage principal and interest payment has gone up 11.5 percent, from $1,015 in April 2005 to $1,132 in April 2006. The Energy Information Administration estimates that in February 2006, the price of electricity was 12 percent higher than in February 2005, natural gas was up 28 percent and home heating oil was up 25 percent. State and local property taxes for the 2004 fiscal year averaged $1,121 per person, up 13.8 percent from fiscal year 2003 when the average was $985, and 15.7 percent higher than the $969 average for the 2002 fiscal year, according to the Census Bureau.

The survey found that more than 42 percent of Americans cite the lack of affordable housing in their community as one of their top three concerns, following high energy costs (82 percent) and the lack of affordable health care (53 percent). Nearly a third worry that the cost of housing is so unaffordable that they will never be able to buy a home, and more than 58 percent are concerned that the cost of a home is becoming so unaffordable that it is hurting their local economy.

Anywhere between one-fifth and one-third report not seeing as much of friends and family and not being as involved in their neighborhood as they would like. They also report missing out on promotions, having less productivity and cutting back on vacations because they have to work too much to pay for their homes or they dont have the money because of high home costs.

The lack of affordable housing is also affecting renters. More than two-thirds (68 percent) of Americans believe having enough money to pay rent every month is difficult for families in their community, up seven percent from last year.

Support for affordable housing is high. Eight in 10 would be willing to support more affordable homes being made available for people in their community, and a record 68 percent would be more likely to vote for a candidate that worked to make housing more affordable in their area, up six percent in two years.

People care about affordable housing, and a candidates position on this issue makes a significant difference to voters, said Stevens. Americans are increasingly looking to their community leaders to seek ways to take a more active role in addressing affordability issues in their communities.

Most Americans are also increasingly concerned that their children or other family members will not be able to afford housing in their communities (57 percent) and that they and family members will be forced to live in less desirable areas because homes in more desirable areas are not affordable (46 percent).

Welcome to “The sub-prime forum,” a column designed to help improve your knowledge of alt-A lending and offer tips to increase your share of this lucrative market.
Ken Orman is president and co-founder of Plano, Texas-based Kellner Mortgage Investments. As a mortgage professional, Mr. Orman has more than 14 years of experience working in the mortgage lending industry.Recently, articles regarding the sub-prime mortgage industry have been pessimistic. Article after article addresses shrinking margins, widening spreads, slow housing starts, increasing interest rates and rising delinquencies. The articles about growth and pipeline management seem non-existent. Well, to add to the doom and gloom, it is all true. However, sub-prime lenders recognize that their businesses will continue to flourish if they adapt and make necessary changes.

Some changes have been dramatic, mergers and office closings being two of the most apparent. Other changes have been less obvious. For example, correspondent lenders that used to sell loans in bulk are choosing to lock loans as best-effort commitments and sell them flow (one loan at a time). Even though the lenders may not earn as much in premiums and incur fees in this structure, this change helps to better predict earnings and eliminates the hedging risk, provided that delivery times are met.

Additionally, secondary marketing managers who securitize non-conforming product by way of collateralized mortgage obligations are offering deals that include loans with higher FICO scores and lower loan-to-value ratios (LTV) to improve servicing predictability and prepay speeds.

Even though delinquencies have risen, servicers are taking more time and additional steps to avoid foreclosing on their mortgagors. Workout programs that serve as tools for lenders to calculate and reduce borrowers’ mortgage payments for several months are common practice. Borrowers who have lost jobs, had medical or family emergencies or have fallen on hard times witness their mortgage companies taking a partnership approach to debt collection, as opposed to the standard practice of “30, 60, 90, foreclosure.” This practice helps to avoid the expense, time and man-hours required for asset recovery, asset management and liquidation.

However, not every lender is changing. A common complaint that I hear from mortgage brokers is that sub-prime lenders are dramatically different. Each lender has its own set of underwriting parameters and closing procedures. Technology is proprietary and formatted differently. There appears to be substantial differences between lenders and their programs, rates and yield spread offerings.

However, the gap continues to close between conforming, alt-A and sub-prime. Some of the more creative sub-prime lenders have developed broader platforms, and non-prime has become a catchall term for any loan not qualified, for any reason, as conforming.

The following is an examination of some of the products that will be widely used in the coming months.

First, high-LTV, first-lien cash-out loans will be an exciting market in the immediate future. Sub-prime lenders have created numerous products over the years that have helped borrowers attain financing. In order to help the borrower attain the lowest monthly payment, many sub-prime loans were written on two- to five-year adjustable rate mortgages (ARM). Sub-prime borrowers, who would have been declined in underwriting 10 years ago, have been in their homes for a few years and are experiencing large payment increases as the fixed periods of their ARMs mature. These borrowers are requesting refinances to lower their existing housing payments and also to consolidate debt or pull cash out. Since LTV is typically the most important factor when structuring a sub-prime loan, borrowers whose needs demand 100 percent financing require alternative financing to conforming products.

Developing a marketing strategy around refinancing options for sub-prime borrowers has long been a common practice, and it will become more popular in the coming months. There are numerous lead sources available to loan officers who want to assist borrowers in attaining a loan that better fits the borrowers needs. Many Internet-based lead services sell pre-screened leads. Simply open any search engine, type in “mortgage leads” and millions of Web sites will be available for viewing. However, proceed with caution. Many of these services sell outdated leads to several buyers at the same time. Additionally, there are several document-retrieval services that can provide specific information from county records. Borrowers who have obligations to traditional sub-prime lenders can be searched for and sorted by mortgages or deeds of trust.

Second, many sub-prime borrowers are applying for and financing second homes and investment properties.

According to the National Association of Realtors (NAR), in 2005, 40 percent of all home sales were for investment or second homes, up 16 percent from 2004. NAR’s chief economist, David Lereah, cites aging baby boomers as the fuel for this segment of the market. They are in their premium earning years and have a strong desire to diversify their investments. Many sub-prime lenders have begun offering full-doc, 100 percent investment products and 95 percent LTV options for investment purchases and refinances for borrowers who can evidence cash flow with bank statements. These products, which still serve as niche products to many loan officers and brokers, have become more traditional in their offerings. Many sub-prime companies offer the ability to underwrite and price these types of loans through automation. Traditional sub-prime lenders used to neglect this segment of the market. Today, sub-prime lenders rely on investment and second-home borrowers. These borrowers provide a great source of revenue for sub-prime secondary markets, which have thinned margins substantially in the last 12 months.

There are several strategies you can employ to generate leads with investors and second-home purchasers in mind. Of course, referral business from real estate agents is a great way to obtain mortgage applications. Having several relationships with productive real estate agents will help substantially in the wake of a slowing refinance market.

Moreover, marketing directly to borrowers who own more than one home in a specific county is another good source for leads. These borrowers have a higher tolerance for risk. Obtaining lead lists from services that search county records can be a good source for a direct-mail campaign.

Lastly, the most obvious and common loan for sub-prime lenders is the purchase-money, owner-occupied first lien. Even though the real estate market has cooled a touch since last year, sales of new and existing homes remain high. In fact, NAR cites that even though new-home sales were down in March 2006, existing-home sales increased from February 2006.

In recent discussions with sub-prime lenders, they expect low- or no-money-down products to make up the majority of their purchase-money volume. A good way to source these loans is to keep in contact with your previous customers. Personalized newsletters, postcards and phone calls keep your name and services in front of your borrowers. The federal do-not-call regulations allow a telemarketer to call a consumer if the consumer has purchased, leased or rented goods or services from the company within 18 months preceding the call.

Sub-prime lenders need quality loans to sustain or return to profitability. Without the help of creative and assertive loan officers, lenders will continue closing doors and turning away from wholesale.

Sub-prime will be a fantastic market for a slowing conforming refinance market. Set your strategy, aggressively seek out borrowers and keep informed about new products and trends. Wholesalers are only as good as their retail partners.

Credit scoring is a major factor when approving a borrower for a loan. For the last 20 years, the FICO score has been the scoring system used by the majority of lending institutions. In recent years, credit scores have also been used by home and auto insurance companies to determine rates and by employers to determine the character of employees or applicants. Credit scores can have a major impact on a consumer’s life and financial situation, and can either cost or save him thousands of dollars.

The FICO scoring model was developed by the Fair Isaac Corporation. A consumer’s credit behavior determines the score. Factors that affect the score include account payment histories, types of credit, outstanding debt, length of credit history and recent inquiries. The score ranges from 350-850; 850 being the best rating. Variations in the score often exist between the three major credit bureaus. A consumer may have a 610 with Experian, 650 with Equifax and a 705 with TransUnion. The lenders frequently use the middle score to determine whether a consumer’s credit is approved. Only in recent years have many consumers begun to realize the importance of understanding what a credit score means and what factors affect their score.

On March 14, the three major credit bureaus joined hands to form a company called VantageScore, which has developed a new scoring model. The company claims that its model will help to more accurately grade a consumers credit risk. The new scoring model also uses a new grading scale, which is similar to the letter grading scale we are all familiar with from elementary school. The new scores range from 500-990:

- 901-990 = A
- 801-900 = B
- 701-800 = C
- 601-700 = D
- Under 600 = F

VantageScore has not described details of what factors are used to calculate the credit score, though they will probably be similar to those used by FICO. The company claims that the new scoring model will reduce variations in credit scores among the three credit bureaus by 30 percent. All three credit bureaus compile their own information in consumer credit files and are prohibited by law to share information, which causes variations in credit reports between the three bureaus. Scores only reflect the information in their report; therefore, slight variations in scores will always exist, even with the new scoring system.

VantageScore is currently available to lenders but is not yet available to consumers. Very little information about the new scoring model has been released by the company. Experian is trying to make the new scores available to consumers this summer, and Equifax and TransUnion will follow shortly afterward.

Some controversy exists over the new scoring system. Some consumer advocacy groups say that the new scoring system will complicate things for consumers who are already confused about how the current scoring system works. Other consumers and lenders are in favor of trying a new, simplified and more accurate scoring system. There is also the opinion that the new scoring system still fails to correct the problem of inaccurate information being reported on consumer credit reports and that variations will still exist.

Lenders will have the option between using VantageScore and FICO scores, or may even choose to utilize both scores in assessing the risk associated with a potential borrower. For lenders, the new scoring model may lower the price of the credit scores due to competition in the marketplace. It is also said that the people with less credit history or younger consumers new to credit will be more accurately evaluated under the new scoring model, which could benefit lenders during the underwriting process.

Overall, despite which scoring system is used, the ultimate determination of the score lies with the consumer and his credit behavior. A consumer’s credit behavior is compiled and reflected in the credit reports. The scores only summarize and measure what information is contained in the credit reports, so consumers should continue to concentrate on good credit behaviors, such as paying bills on time, keeping balances low, building credit and keeping inquiries to a minimum. It is also important for consumers to check their credit reports frequently to correct errors and prevent fraud, or just to have an understanding of where they stand and what they can do to improve and maintain a better credit rating for the future. A consumer can save thousands of dollars by improving his credit rating and practicing good credit behaviors.

Consumers can contact a reputable credit restoration company to assist them with improving and maintaining a better credit score. Credit restoration companies assist clients with improving and maintaining their credit rating, as well as helping consumers to understand credit, how it is scored and how their behavior affects their score. This can be extremely beneficial to many consumers who feel left in the dark about their credit. It may be beneficial for you to refer your potential clients who need some assistance with score improvement to a credit restoration company. Choose a company that will work with you, keep you updated and send the client back to you for financing when they have completed their service. In the end, your client improves his credit, gets the loan he needs and may have changed his life for many years ahead.

Success begins with a person’s will, for it’s all in the state of mind. According to Webster’s Dictionary of the English Language, success is a favorable result that one has tried or hoped for. It may be the attainment of wealth or fame, and it could mean that you are a successful person.

You may be asking, “What does this have to do with commercial loan brokering?” Well, to tell you the truth, it has everything to do with it. My intent will be to provide you with a comparison for further consideration as you try to maintain a successful track of business for yourself and your company. Furthermore, I hope that I can persuade you to consider the other side of our industry - commercial loan brokering. It can provide very favorable results as an adjunct to your residential business.

Part of the success team is education. You can’t do it alone, although you can try. Educating oneself through designed courses, such as those taught through the education program of the National Association of Mortgage Brokers, will begin the formal process of preparing you for dealing in the commercial arena. Don’t embarrass or frustrate yourself with a client if you do not have some type of formal training. Commercial clients usually can tell within a matter of a few minutes whether you know what you are talking about or are playing the bluff game. And remember your reputation, for it will follow you. Therefore, as a member of the National Association of Mortgage Brokers, ask for these courses to be taught in your area or state. Request your state representatives to encourage the offering of these courses both on a state and national level. Whenever there is a state or national conference, educational courses, including commercial ones, should be offered, and member attendance should be encouraged. Make the effort to take as many recognized courses, through NAMB or the National Association of Realtors if commercial loans entice you. Whether you continue in the commercial field or not, you can always say that you tried.

Another part of the team is commitment and perseverance. It may not be easy and you will certainly run into obstacles. But regardless of where they come from, you usually can overcome those obstacles by working diligently with other professionals. Start with some small transactions, get your feet wet and remember that you don’t always have to do it by yourself. Ask for help. Work with other professional brokers and let one or two of them be your mentor(s). If you feel good and trust that person, let him be the angel looking over your shoulder. We normally recommend starting off with a small loan request, but it can happen that a multi-million dollar deal lands on your desk. Relax. Don’t get frustrated. Ask for help, co-broker the deal with another professional and keep your fingers and toes crossed that the deal not only gets approved, but actually gets funded as well. Lastly, remember the theory of reality. You cannot always be successful in every project you are working on. I always use the 20/2 rule; if twenty deals come into our office, two may make it to closing.

Don’t get alarmed when you make a few mistakes (I guarantee that you will). Don’t let those mistakes or failures discourage you. Without mistakes or failures, you cannot have successes. I guarantee that successes will come. They will be in the form of a genuine feeling of accomplishment in assisting your clients in achieving their goals and, at the same time, the reality of life - getting paid and receiving your commission for a job well done.

When you are marketing yourself, remember not only the potential clients, but the multitude of lenders as well. Clients seek your help in packaging their transactions and lenders need you so that they can approve and fund those deals. Over the past few years, we in the brokerage community have been blessed with an abundance of mortgage funds (not only residential, but also commercial). Not only do we do business with the local and statewide lenders in our area, but also in the Wall Street conduit market - the big source of funding. When I say big, I mean big. For the year 2005, the commercial mortgage-backed security market garnered $169.2 billion in loan production, and that was only one segment of the marketplace. If this sounds exciting to you, then grab on and take a piece of that pie for your business.

Whether you seek fame or not, it will come to you. It may be in the form of one client talking to another about how you, as his commercial mortgage broker, helped in obtaining the financing for his commercial project. It may be in the form of a newspaper announcement indicating your firm as the successful broker of record. It may just be the congratulations from your peers. As humans, we all look to some form of recognition, and it certainly enhances our ego. Therefore, as you obtain success, relish the accolades showered upon you. Never feel that you are outclassed and that you will not succeed. Always feel that you are a successful businessperson. Think highly of yourself, because not everyone will do so. Success begins in your mind. If you think you will succeed, you will, my friends, for “It’s all in the state of mind.”

 The names and details mentioned in this article have been changed to preserve anonymity.

Jessica Olstrom was looking for extra cash to pay off mounting bills. She went to Equity Builder Mortgage to do a refinance. She got the cash she wanted, but she, her daughter and her granddaughter now wish that she hadn’t taken the traditional forward mortgage cash-out refinance route.

In June 2004, a loan officer at the Twin Cities-based mortgage brokerage put Olstrom in first and second liens interest-only loans. Mortgage banking colossus Jungleside Home Loans table-funded both loans. In August 2004, Jungleside Financial, the retail division of Jungleside Home Loans, refinanced the 81-year-old Jessica Olstrom’s second mortgage, increasing her indebtedness. Let’s review some facts in this transaction:

• Olstrom’s income after paying her Medicare premium is $832.
• The loan officer at Equity Builder Mortgage put her in a stated-income program and stated her income at $4,801. Olstrom claims she wasn’t aware of the stated-income program. She couldn’t believe that there were programs like this.
• The first lien is $163,865 and the second is $62,153 with interest and penalties.
• As of March 2006, her suburban Twin Cities home was valued at $256,000.

Unless a miracle happens by the time you read this article, Jessica Olstrom will have lost the place she has called home for more than 16 years—a sheriff sale was scheduled for the first week of April.

A reverse mortgage lender close to me was trying to get Jungleside Home Loans to halt foreclosure and allow a reverse mortgage bailout. His argument on Olstrom’s behalf is simple: Jungleside would lose financially if the foreclosure goes through and its reputation would take a hit if the details of the transaction hit the front page of the Star Tribune or The New York Times.

Jessica Olstrom’s situation is becoming more common, as cash-squeezed older adults try to get extra cash from their homes the old-fashioned way—cash-out refinance. The situation is compounded by mortgage lenders and brokers who are blissfully unaware of reverse mortgages as superior cash-out programs for some older adults.

Let’s assume the originating loan officer at Equity Builder Mortgage wanted to help Ms. Olstrom solve her cash flow problems. He may not be aware of reverse mortgages. However, if Jungleside’s underwriters had been competent in reverse mortgages, the underwriters could have been alerted to the potential financial and regulatory risks and negative publicity inherent in the Olstrom refinance. They could have suspended the file and referred it to their reverse mortgage unit (assuming the company has one) for further analysis. They could have advised the broker on the suitability of the traditional cash-out refinance for Jessica Olstrom. They could have advised their retail division not to do the second refinance.

Yes, some will say that the Equal Credit Opportunity Act (ECOA) says that mortgage lenders and brokers can’t discriminate on the basis of age and they would seem to have a point. But this is not about discrimination. It’s about risk management! Underwriters are risk managers for their employers. You don’t have to be a very smart underwriter to see the red flags all over this transaction!

There are a few steps astute mortgage lenders and brokers can take today to start mitigating these still unappreciated risks in residential mortgage lending in the age of reverse mortgages:

• Train all account executives, loan officers, processors and underwriters in the essentials of reverse mortgage lending. That way, they can be sensitive to the needs of older adult borrowers on fixed incomes who need cash without the mortgage payments.
• Underwriters should scrutinize any stated-income refinance for a person 62 or older for program suitability.
• Lenders and brokers should disclose to any cash-out refinance borrower who is 62 or older that reverse mortgages exist, whether or not their organizations offer the products.
• Make this reverse mortgage availability disclosure standard application documentation for all cash-out refinances for older adults.
• Form a reverse mortgage unit to handle these home lending situations internally (the benefits are huge relative to the costs). If your loan officer or account executive, upon careful evaluation, concludes that a borrower would be better served by a reverse mortgage, the loan officer or account executive refers the borrower to the in-house reverse mortgage unit.
• Form strategic partnerships with competent reverse mortgage specialists in your operating locations if you think that an in-house reverse mortgage unit may not be cost-effective.
• Encourage your network of origination partners to gain adequate reverse mortgage competency; sponsor reverse mortgage training for them.
• Keep an eye on what is happening in reverse mortgage country.

It used to be said that reverse mortgages were niche products better left to niche players. Well, if that was the correct conclusion years ago, I believe that it is no longer the case in a market and a culture dominated by aging consumers. The demographic realities we face—shrinking younger consumers and expanding older ones—are structural and irreversible for today and tomorrow. The smartest and most profitable way to adjust to these new facts in the marketplace is to add products that serve a growing market to your residential lending product mix.

IndyMac Bancorp Chairman and CEO Michael W. Perry and his team recognized these realities when they bought the 800-pound gorilla in the reverse mortgage jungle more than two years ago. Tentatively, some lenders and brokers are beginning to recognize the strategic value of reverse mortgages and they are taking steps to become what I call “reverse-ready.” There should be more!

Finally, secondary market risk managers should begin to pay attention to the significant financial and regulatory risks and negative publicity that traditional cash-out refinances to older adult borrowers (62 or older) pose to their portfolios. We will see more Jessica Olstroms in the years ahead.

Think reverse. Move forward!