Carrington Mortgage Services is moving into sub… er, um, ‘nonprime’ lending in a big way, having lowered its minimum credit requirement to a FICO score of 550, as well as having expanded its guidelines on a number of Federal Housing Administration (FHA), Veterans Affairs (VA) and U.S. Department of Agriculture (USDA) loan programs.
In addition, so that it may better focus on the ‘underserved’ market, the company is eliminating conventional and jumbo loans from its wholesale product line and is limiting its acceptance of wholesale submissions with FICO scores above 680. However, Carrington will continue to serve veterans with VA loans across the credit spectrum – and it is emphasizing that it is, by no means, exiting the wholesale business.
So why would any lender be crazy enough to stick its neck out and go after the nonprime market?
‘We're doing this for a number of reasons,’ explains Raymond Brousseau, executive vice president of mortgage lending for Carrington, during a recent interview. ‘One, the market needs it, in that it is underserved. Two, we're uniquely qualified to do it. Three, we intend to do it in a responsible way. In other words, they're all going to be qualified mortgages (QMs), and they're all going to be fully documented – plus borrowers will be required to complete an education program so that when the borrower arrives at the closing, there's nothing but full transparency in terms of what the borrower is getting into.
‘We believe strongly that there is a need for private capital and private lending to come back into the marketplace – and the government agrees with that as well,’ Brousseau adds. ‘So our intent has always been to lead that charge to re-introduce non-agency lending. However, until the market opens up enough to allow for securitizations, it's going to be a very slow process to re-introduce non-QM loans and things of that nature.’
As Brousseau explains, Carrington plans to service all of the nonprime loans it originates in-house. What's more, all will be QM loans meeting agency guidelines.
While Carrington is certainly not alone in its effort to get a share of the underserved market – for example, Wells Fargo recently announced that it had lowered its minimum FICO requirement on FHA-backed mortgage loans to 600 from 640 for retail purchase customers – Brousseau says he understands perfectly when people raise an eyebrow when they hear the term "underserved," which is often equated with that nasty eight-letter word "subprime."
"I've been doing a lot of town hall meetings with our loan officers, underwriters and fulfillment folks in recent months – I joke around with them about this as well – and when I announced recently that I wanted us to get down to an average FICO score of 610 by the fourth quarter, they looked at me like I had four heads," Brousseau says, adding that he totally "gets it" when people ask, "What are you, nuts?"
‘Look, we've all been sensitized – or de-sensitized, depending on how you look at it – over the last 10 years, in light of what has happened in the marketplace and some of the poor practices of the past,’ he says. ‘We've all been taught, as mortgage lenders, that the only place we want to focus is on the 720-plus FICO scores. And frankly, that's what everyone has been doing – and that is exactly what is compelling us to do this today.’
As Brousseau explains, it's not as if the ‘nonprime’ loans of 2014 will even remotely resemble the ‘subprime’ loans of 2005-2006, in terms of underwriting. Furthermore, it's not as if the managers at Carrington woke up one recent morning and said to themselves, ‘Hey, let's march right on into nonprime lending.’ Rather, this is a calculated business decision, based in part on the company's strong track record of sound underwriting practices, protecting investor assets and servicing ‘high-touch’ borrowers.
And, as Brousseau explains, it takes a highly diversified, full-service mortgage company like Carrington to take on nonprime lending in this current environment – and manage it well.
‘Carrington is much more than just a mortgage lending company – we've got about 15 different businesses under the Carrington umbrella,’ Brousseau explains. ‘We've got four different divisions – a financial division, which has in it the broker-dealer, the hedge fund, and the asset management group. They are one of the largest participants in the acquisition of non-performing loans – they've been getting active in the acquisition of mortgage servicing rights (MSRs). Then you've got the mortgage group itself – which is our mortgage lending business. Then there is our specialty servicing business – which is the legacy New Century platform. It does high-touch servicing for what was once a very sub-prime portfolio. Then we have our debt collection, as well as security services. Over on the real estate side, we have our Realtor business – which is national, with 1,300 agents across the country. We also have a title and escrow business, a foreclosure management business, a property preservation business and a doc prep business – all focused on residential real estate.
‘Carrington was founded in 2003 out of a need to protect investor mortgage-backed securities – and the way to protect the interests in those securities was to call the servicing rights and service the loans yourself to ensure the loans are repaid and perform,’ he adds. ‘So, the origination side of the business has an Alt-A background. That high-touch, less-than-perfect client – it is in our DNA, as a company, to manage that type of client.’
Brousseau points out that because Carrington already specializes in servicing distressed loans, it already has the infrastructure (people, processes and technology) in place to move into nonprime originations and to service those loans in-house.
"If we were looking to go out and originate loans to a segment that has proven to be challenged in the past, there's no way we would do that and then sell it off into the secondary market – or sell it service-released," he says. "We have an advantage in that we can originate that type of loan and then deposit it into our specialty servicer, which has a history of servicing those types of loans. So we are uniquely positioned to do this."
What's more, the company has been preparing for this transition for about two years. Brousseau explains that although Carrington's origination business has grown for the past five consecutive quarters, despite the decline in origination volume, it could have been better positioned, as of three years ago, to get a bigger share of the purchase pie.
He says while the company's competitors scooped up plenty of purchase volume when things were going well during 2012 and the first half of 2013, "We were not positioned to do that because we did not have the infrastructure in place to grow the business."
"So we spent the better part of 2012 and first half of 2013 getting the infrastructure in place – we opened three new operations centers, we adopted a new loan origination system, we changed out our incentive plans, we changed out our investor base, we restructured the file flow for our operations, retail and wholesale – so we did a lot of foundational work which was completed midyear last year," he explains, adding that these measures are what drove the company's recent quarterly growth.
Despite this recent growth, however, the writing is clearly on the wall:
"If you look at origination volume – there was about $1.7 trillion in originations in 2012, $1.3 trillion in 2013, and it's forecast to drop to $1 trillion in 2014 – the reality is there is no way to sustain that type of growth in a shrinking market," Brousseau says, adding that if the goal is simply "to remain on par with everyone else â�¦ you're going to get beat."
"So we realized in 2013 that we had to differentiate ourselves – and there's not too many ways to do that: You can do it by price – in other words, you can try and go out there and buy the business – or you can differentiate by way of customer service or by product offering," he says. "For us, we looked at our skill set and our heritage – the way we are diversified as a company, and the infrastructure we have in place, and the first conclusion was, we're equipped to service this type of a client."
Without question, borrowers in the 550 to 680 FICO range are currently an extremely underserved market.
"If you go back 10 years ago, one out of every seven borrowers had a FICO score under 630," Brousseau explains. "Today, one in every 500 loans has a FICO less than 630. About 98 million people – or 31% of the borrowing public – have a FICO of less than 650, yet no one is doing business with them."
And, of course, part of the reason these folks are so underserved is that, since 2008 or so, there hasn't been anyone to serve them.
"When you look at the competitive data, there are 90 different lenders that will compete for a borrower with a FICO score greater than 680," Brousseau explains. "But when you drop that FICO down to 600, the number [of lenders] drops to 16; bring the FICO to 580, and it's 13; at 560 it drops to three; and at 550 it drops to two."
"So, the question becomes, how are we going to grow our business? We can stick to [a minimum FICO score of] 680 and compete against all the other guys – but the only way we are going to capture that business, unless we come up with something incredibly different, is to buy it, and the margins there are already extremely thin," Brousseau says. "No one is fighting for the business [that's under 650], but we're equipped to go there – and quite frankly, the public needs it."
"Say what you want about subprime – there are folks like myself who, for decades, ran very responsible businesses, providing financial services for borrowers who were common, everyday people – and we did it very well," Brousseau adds. "But when things melted down, and the marketplace went away for securitizations, that business just went away. So those borrowers are stuck with having their needs met by payday loan companies and title companies – and that's not a good alternative for them. The market for us is clearly there."
One thing that remains unclear, however, is how much new business the underserved market will actually generate for players such as Carrington.
When asked to estimate how much additional business the company expects to realize through the move, Brousseau says, "I don't know if we're prepared to put a stake in the ground and say 'x' – because there is a big question as to how this segment of the population will respond. One train of thought is that this population has been neglected for a good period of time [and thus will be hungry for opportunities]. I know how they responded 10 years ago, but I don't know how they are going to respond today. Their mindset has been impacted over the past eight years."