(Orawin Velz is director of economic forecasting in the Mortgage Bankers Association’s economics and research department. She can be reached at ovelz@mortgagebankers.org.)
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As someone who’s involved in mortgage portfolio investment, I’ve been spending a lot of time answering the same question: will Wall Street continue to have an appetite for subprime loans in view of the industry’s recent collapse?  My answer is yes, but…

The “but” is that the market will continue to invest, BUT we’re also expecting investors to tell the sellers that they’ll be taking a more conservative approach to subprime loans. According to meetings I had with Wall Street investors recently, they’ll be very careful about what they buy and will institute a more conservative diligence practice around the loans that are purchased. What that means to lenders is that these investors will be stricter about their purchase guidelines and will grant very few if any exceptions to them. 

Historically, what people in Wall Street firms would do with subprime loans was to take a small sample of the loans in a package and perform a diligence review of valuation credit and compliance. For example, a firm would take a sampling of around 10 percent for diligence. Not now. Sellers can expect a significantly larger sample selection that could be up to 100 percent and the sample selection will be based on who the sellers are along with the characteristics of the pool. 

The old adage for subprime loans was that you made the loan on the property, not on the borrower. By definition, many subprime borrowers had distressed credit, so those providing loans to subprime borrowers had to put an additional focus on the value of the property versus relying on the borrower’s credit. Historically there has been some tolerance between the appraised value of a property and the diligence value. If the property value was $100,000 based on an appraisal and the diligence value came in at $90,000, the 10 percent variance between the two most probably would be accepted. Not now. Today, the value of the property would be $90,000. In other words, the due diligence value would trump the appraised value. 

Advice to Lenders
So what does that mean to lenders? Know your investors and know where your programs stand with them. Here are a few concrete suggestions for moving forward in the new subprime environment:

• Understand your investor’s new diligence standards. Expect those standards to be more conservative. You should also know that investors are more than happy to share those with you. They don’t want to kick loans out of the pool you bring them. Make sure you keep the lines of communication between your investors and your institution open so you can meet their needs and yours.

• Have independent diligence companies who have appraisers and underwriters participate in the review for the valuation and underwriting of loans prior to selling them to the investment community. When we do this for lenders it gives their investors a comfort level that comes from having an independent, unbiased party establish the value to support property values and borrowers’ credit worthiness.

• Find out if your investors have a pre-certification program. Many Wall Street firms are establishing pre-certification programs where they are using companies like ours to revalue or audit property values before accepting them. Ask your investors if they have such a program in place and how you can participate. This audit allows the investor to have a comfort level before they purchase the loan package.

• Vet any new loan programs with investors before you roll them out. Investors will tell you exactly what you have to do to make your loans more appealing to purchasers. Many investment firms will give you feedback on the programs before you roll them out. That way you can change the program to avoid having loans that you can’t sell after you’ve originated them. 

• Readdress your current loan programs to make sure investors have no issue with their characteristics. Everything’s going to tighten up. There’s a concern in the market place about all originations, so make sure you don’t’ need to change any of your current programs before it’s too late.

This brings us back to where we started. Will Wall Street continue to participate within the subprime industry? Yes, “BUT”…the “but” is that lenders need to know what loans they’ll want and alter their lending programs to account for them. 

(The views expressed do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA NewsLink welcomes your submissions. Inquiries/articles should be sent to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)
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MISMO standards provide evaluators with tools for data review and verification, which in turn set evaluation quality measures and enhance speed in processing loans.

“The most important thing people need to understand is what they can do with the data that the MISMO appraisal and AVM models produce. They can understand the data and use it as a tool to make accurate evaluations,” said Victoria Cassens-Zilloux, managing director of real estate and lending practice at Strategic Development Worldwide, San Diego, speaking here at the Mortgage Bankers Association’s National Technology in Mortgage Banking Conference & Expo.

Most people use data to just pass the loan, but the appraisal data offers so much more, Cassens-Zilloux said. “Through careful analysis, you can analyze your loan footprint in relation to general market trends—it’s all contained in an aggregate and it’s up to us to use the available data,” she said.

The MISMO industry footprint is gaining visibility, according to the 2007 National Chief Appraiser Survey, which assessed valuation industry concerns including MISMO issues of appraisal quality and independence, valuation products, appraisal management companies, technology and valuation fraud.

While the survey found that 27 percent of those surveyed didn’t understand MISMO and were leaving it for the IT group in their companies and 24 percent did not follow articles and information published about MISMO, 47 percent said using MISMO standards in future appraisal processing projects is important to them. 

When asked about using data, 17 percent said they have the data and could access it and use it to verify if the appraisal has been completed.

“The importance of accuracy in property valuations is critical to the market—how real estate is evaluated and its economic implications,” Cassens-Zilloux said. “The individual appraisal data is just the tip of the iceberg—there is so much data in each report that should be used to achieve precision.”

The MISMO standards offer opportunities to review and verify data, update loan processing systems, provide for enhanced underwriting decision engines, increase opportunities for quality control and enable faster decisioning, Cassens-Zilloux said.
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Biggert, ranking member on the Housing and Community Opportunity subcommittee, said the bill would close up flaws in the NFIP that were exposed during the 2005 hurricane season, which devastated parts of the Gulf Coast. “The program needs to provide a financial safeguard for homeowners while protecting the interests of taxpayers. This bill strikes the right balance,” she said.

The bill would enable small business owners to purchase business interruption coverage to meet payroll and other obligations in the event of flooding. It also updates maximum insurance coverage limits for residential and nonresidential properties.

Co-sponsors include Reps. Earl Blumenauer, D-Ore.; Gary Miller, R-Calif.; Gene Taylor, D-Miss.; Richard Baker, R-La.; Doris Matsui, D-Calif.; JoAnn Davis, R-Va.; Maxine Waters, D-Calif.; and Ginny Brown-Waite, R-Fla.

Ratings Agencies Weigh in on Subprime Servicing
Ratings agencies issued reports this week suggesting that increased liquidity pressures on subprime mortgage companies could be felt in servicing operations. Fitch Ratings and Standard & Poor’s also downgraded subprime servicer ratings.

“Financial condition is an important component because it affects the servicer’s ability to remain in business and continue to make investments in infrastructure, systems and staffing to meet its current and future servicing needs,” said Fitch Senior Director Mary Kelsch. “The financial difficulties of the various parties thus far have been caused mainly by liquidity, overcapacity, margin pressure and poor asset quality, all of which are directly origination/seller focused.”
 
Servicers who do not have either a diverse product mix or financially strong resources could ultimately see their operations adversely affected, which may result in staff layoffs, loss of new loan volume and higher default levels, Kelsch said.

S&P published a report showing that current expected losses in subprime mortgage-backed securities parallel performance of such securities in 2000—between 5.25 percent and 7.75 percent. The report also noted that while most “BBB” and “BBB-” classes are protected from losses, they are likely to see higher default rates than other similarly rated classes.

"The number of total and serious delinquencies for the 2006 vintage is consistently higher than for deals issued between 2001 and 2005," said credit analyst Michael Stock, a director in the U.S. RMBS ratings group at Standard & Poor's. "However, the loans in the deals issued in early 2006 have nearly the same level of serious delinquencies after just 12 months of performance as those in the 2000 vintage, which had 6 percent in serious delinquencies after one year of performance."
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The Data Book combines the most up-to-date information on various topics of interest to industry participants and observers. The newly expanded Data Book now includes the following topics:

• Economic Outlook—including commentary, long-term real estate finance and macroeconomic forecast, employees on non-farm payrolls and Treasury yields and bank rates;

• Commercial/Multifamily Finance Environment—including comments from the Federal Reserve Board's Beige Book, property sales volumes, capitalization rates and multifamily building permits, starts and completions;

• Mortgage Production—including originations, CMBS issuance and ACLI commitment volumes as well as CRE CDO issuance;

• Mortgage Debt Outstanding—which now includes CMBS debt outstanding;

• Loan Servicing; and

• A listing of recent MBA Commercial/Multifamily Research news releases.

To view the Data Book, go to www.mortgagebankers.org/files/CREF/data/2006/MBACREFDataBook4thQuarter2006.pdf.
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The 10-year loan was financed through the Freddie Mac Streamlined Refinance Program and carries a fixed interest rate of 5.61 percent. The loan is interest-only for the entire length of the term and represents 70 percent of the property value. It was underwritten to a minimum 1.15x debt service coverage ratio (DSCR).

Loan proceeds were used to refinance the existing first and second mortgages on the property and enabled the borrower to recoup $3.5 million in equity. Freddie Mac waived a portion of the prepayment penalty associated with the existing loans and a portion of the yield maintenance premium was built into the spread of the new loan. 

Johnson Capital closed transaction within 35 days of the borrower’s application.

Built in 2003, St. Clair is a Class A property located in the Spring Valley submarket area of Las Vegas with current occupancy at 94 percent.

Johnson Capital also procured a $10 million loan for a nearly 51,200 square-foot mixed use property located in the garment district in downtown Los Angeles.

The commercial mortgage-backed securities (CMBS) fixed-rate, five-year term/25-year amortization loan was non-recourse and competitively priced over the five-year Treasury. Johnson Capital negotiated a "step-down structure," allowing open prepayment in years four and five. All of the loan proceeds represented cash out to the borrower as the asset was previously unencumbered.

Meanwhile, Johnson Capital’s Irvine office provided high leverage financing for acquisition and rehab of Windscape Apartments in Mesa, Ariz. The 313-unit, class B property was financed with a national balance sheet lender at more than 90 percent of total project costs. 

The four-year floating rate loan was priced in the low 200s over LIBOR and non-recourse to the borrowing entity. The funding also included a sizeable rehab budget and interest rate cap to hedge the client’s interest rate risk.

Johnson Capital’s Phoenix office arranged a $7.9 million to refinance the Wells Street Apartments, a six-building, 212-unit multifamily project in Milwaukee. The buildings are on six separate parcels and were built between 1927 and 1961. The loan represented a senior note on nearly $7.45 million and a mezzanine note on $348,700.
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Commercial Loan Origination 101 teaches professionals how to effectively analyze potential investments through a comprehensive understanding of the basic components of commercial real estate finance, from property types to risk analysis. At this two-day interactive workshop, you will learn who's who among the players in the process, as well as the basics of the four main types of commercial property: Retail, Multifamily, Office and Industrial. Students will gain an understanding of mathematical concepts, commercial mortgage issues and building analysis.

By registering for Commercial Loan Origination 101, you will learn how to describe the process and players of commercial loan origination; compare the characteristics of the four main commercial property types; perform math calculations involved in the loan origination process; as well as develop a pro-forma and apply the capitalization approach to determine the value of a property.

Commercial Loan Origination 101 will take place at MBA headquarters, 1919 Pennsylvania Avenue NW in Washington, D.C.

Registration is $895 for MBA members and $1,343 for non-members. To download the registration form, go to http://www.campusmba.org/products/default.aspx?product_code=E2701885/REGIS.

For information about Commercial Loan Origination 201, which takes place May 16-17 in San Diego, visit the course Web Site, http://www.campusmba.org/products/default.aspx?product_code=E2701793/REGIS.

Contact Info:
For registration information, to purchase this course for someone other than yourself or to enroll multiple individuals, please call (800) 348-8653 (8:30 a.m.- 6:00 p.m. ET).

Contact E-mail:
campusmbaeducation@mortgagebankers.org.
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Among the program options:

• Compensation Benchmarking: This comprehensive survey provides key data from across the commercial real estate finance spectrum, collected by function, specialization, business or product group, and including factors such as loan production volume, assets under management, geographic location and revenue size.

• Productivity Analysis: This report provides in-depth analysis of the correlation between loan volume levels and compensation, and allows participating firms to compare production levels and compensation data with external benchmarks.

New in 2007: the Benefits Survey, which provides financial services firms with key market data related to prevalence of plan types and policies, costs of individual benefit programs and employee participation and contribution rates. All important benefit categories are covered, such as: health and welfare, retirement, paid time off, relocation practices and personnel practices. MBA members will receive a complimentary custom mortgage industry benefits report.

All data gathered is confidential and no individual company information is published. MBA members receive a discount on survey fees.

The following links provide more information on the surveys as well as a registration form.

• Commercial Mortgage Banking Compensation Survey Program Overview
• 2007 Benefits Survey Overview
• 2007 Participation Form

For more information, contact McLagan Partners at (203) 359-2878 or one of the following MBA contacts: Marina Walsh at mwalsh@mortgagebankers.org (202) 557-2817 or Stephanie Giannori at sgiannori@mortgagebankers.org  (202) 557-2879.
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“We’re seeing more and more pieces of the eMortgage process get implemented,” said Harry Gardner, senior director of industry technology with the Mortgage Bankers Association, speaking here at the Mortgage Bankers Association’s National Technology in Mortgage Banking Conference & Expo.

GMAC Bank, Horsham, Pa., has moved closer to company-wide use of eMortgages. Barbara Krawczum, managing director with GMAC Bank, said the company wanted to do it right the first time.

“Our desire in this process was start small and be an early adopter,” Krawczum said. “In our first initiative, we sought out partners who had a passion for moving into the eMortgage process. We really wanted to work in collaboration to move toward execution.”

Those partners included MBA, MISMO and MERS, Vienna, Va., the industry utility created by the mortgage banking industry 10 years ago with the goal of moving the industry from a paper to an electronic format, along with Encomia, Houston and 1st Advantage Mortgage, Lombard, Ill. Krawczum said GMAC was very satisfied with the collaboration.

“In doing so we actually helped set some of the industry standards,” Krawczum said. “They listened to some of the things we said and used them as best ways of doing things. Now we are looking for more partners so that we can be more active in this environment.”

Michael Grego, COO of 1st Advantage Mortgage, said eNote delivery produces “huge wins for us. On the operations side, we’ve been able to build efficiencies and streamline operations.”

As a correspondent lender, Grego said 1st Advantage said the ability to get loans through the pipeline sooner through eNotes creates business advantages. “eNotes enable us to reduce negative warehouse interest expense and increase business capacity,” he said. “Loans are purchased within a day or two of closing. It enables our warehouse lines to be turned several times a month, which increases our cash flow, eliminates the need for interim service loans and requires fewer staff for shipping and post-closing.”

Grego estimated that eNotes have reduced shipping costs by nearly 90 percent, from $60 per batch of loans to just $10. “FedEx and UPS probably wouldn’t like to know that,” he said.

Grego also noted that eNotes reduce errors and data entry mistakes. “The automated systems have logic built in to make sure that the correct note is used and all required documents are present and signed properly,” he said. “The system will not allow you to continue and close a loan without the predetermined criteria in place. Data entry was a huge win for us; it eliminates the keystroking errors. As a result, we’re delivering a higher quality product and creating greater customer satisfaction.”

Krawczum said that eMortgages enhance the bank’s role as a custodian—the safekeeping and tracking of the collateral.

“We’re doing the same work, just in a different environment,” Krawczum said. “There is no difference in the need to hold paper documents and electronic documents; eVaulting is simply a hybrid environment in which we perform the same functions. We hold it, track it, maintain it and release it.”

GMAC Bank provided its first pilot third-party eMortgage custodial services earlier this year. “We were able to prove that it could work,” Krawczum said. “As a result, I was able to persuade senior management to move ahead with this as a strategic initiative.”

GMAC Bank selected Encomia’s electronic vault software. “It gives us the ability to store any type of electronic data, not just mortgage data,” Krawczum said. “

Kim Herbert, project manager of trust operations and document custody with GMAC Bank, said the bank got into the eCustodian field because of a sense that the industry was “fully engaged, out there and ready for a solution.” The end goal, she said, is to manage risks.

“At the end of the day, we had to work through a lot of ambiguity,” Herbert said. “Cooperation with MBA, MERS and Encomia were critical.”

The advantages have paid off, Herbert said. “From an end-to-end perspective, this is a win-win for all active parties,” she said. “GMAC absolutely believes that it is the collaboration and cooperation that is critical to success. It’s not something that any one company can complete on its own. There has to be a willingness to work together and learn together.”

Pilot programs proved that the system could work on a larger scale, Herbert said. “We had to walk before we ran,” she said. “We had to dip our toe into the water before we jumped in.”

A key goal of GMAC was to eliminate “friction points,” Krawczum said. “When you’re in a paper environment, paper is all there is,” she said. “It creates more risk because of the due diligence required. Better technology and fewer handoffs means there is less risk.”

Down the road, said Daniel McLaughlin, executive vice president and product division manager with MERS, is the government lending element. Ginnie Mae has published a draft eVault guide, and ratings agencies have indicated that they have no legal objections to an eMortgage process. MISMO and the Property Records Industry Association are jointly developing electronic security standards; and on the eRecording front, more than 230 counties now accept some form of electronic recording.

“Most people just see the tip of the iceberg,” McLaughlin said. “Ninety percent of the people who have been involved in this process know how much work has gone into this process, and now it’s up to us to make this process more visible.”
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Kaleidico Lauches Enterprise Edition of icoSales
Kaleidico, Cleveland, Ohio, an Internet technology company that provides Web-based lead management services to mortgage companies and other sales organizations, announced the release of icoSales Enterprise Edition (icoSales EE).

icoSales is a customizable lead acquisition, allocation and management application that aligns prospects with sales staff. The product manages all leads regardless of type or source, incorporates data verification services and synchronizes with online lead generation companies.

icoSales EE is built for organizations with more than 1,000 sales agents and multiple, affiliate offices. The application also allows for controlled branch autonomy so field offices can purchase and measure leads from different sources than the home office, better understand how their sales people are performing with specific leads and then make changes, as appropriate.

More information: www.kaleidico.com.

Data-Vision Offers Multilingual Option
Data-Vision Inc., Mishawaka, Ind., a provider of e-lending capabilities, announced launch of a multilingual option to help lenders simplify the loan process for non-native customers. The multilingual option is available with the firm's LoanQuoter software, which allows lenders to facilitate the mortgage loan application process through their consumer-facing Web portal.

"The Hispanic mortgage market is expanding at an incredible rate, presenting tremendous growth opportunities for lenders," said Randy Schmidt, president and founder of Data-Vision. "A solution that can fully accommodate non-English speaking customers who wish to utilize the Internet to start their mortgage process is needed."

LoanQuoter's multilingual option allows non-English-speaking customers to complete online applications, receive instant decisioning and up-to-date loan status, as well as live help in their native language.

More information: www.d-vision.com.

eLynx Partners with eOriginal to Deliver Vaulting
eLynx, Cincinnati, a portfolio company of American Capital Strategies Ltd., has partnered with eOriginal to deliver electronic vaulting services in eLynx's Hybrid eMortgage service.

eLynx clients can now have their signed documents deposited in an online vault, providing secure access to and administration of the eNote and ancillary documents. Copies of the vaulted documents are made available for recordation, investor review and purchase, servicing and custodial processing. The vault manages rights, permissions and access for viewing, legal ownership/control, vault-to-vault transfers, Certified Print and Paper Out processes, pooling, investor sale, securitization, syndication and end-of-term actions.

More information: www.elynx.com; www.swiftview.com; www.eoriginal.com.

Zumasys Launches TheOnDemandOffice.com
Zumasys, Lake Forest, Calif., a provider of IT services for small- and medium-sized businesses, unveiled TheOnDemandOffice, a new hosted service that provides a virtual Windows desktop and access to collaboration and productivity applications. The base package includes secure browser-based access to MS Office, MS Exchange, MS SharePoint and MS Live Communication Server and secure inter-office Instant Messenger.

TheODO.COM can be custom tailored to the needs of small businesses with the ability to add any third-party software required. This includes customized ERP applications such as accounting software, CRM and document management systems as well as legacy applications, even if they are not currently web-enabled. Customers can also add mobility features such as email replication to Treos and Blackberrys, DID faxing, follow-me phone capabilities and laptop folder replication.

Interthinx Scoring System Integrates with Harland
Interthinx, Agoura Hills, Calif. a provider of comprehensive fraud prevention, regulatory compliance and risk mitigation tools for the mortgage industry, integrated its HCL─High Cost Loan FilterS real-time automated compliance tool into Harland Financial Solutions’ Interlinq E3 enterprise mortgage lending product.

HCL now performs nearly a dozen loan-level compliance reviews and identifies high-cost loan violations as defined by federal, state and local laws and investor guidelines. The Interlinq E3 web-based loan production platform provides business process management, integration and connectivity across the mortgage supply chain

More information: www.interthinx.com.

Fiserv Adds Installment Product Support to Loan Servicing Platform; Launches SourceTrac
Fiserv Lending Solutions, Brookfield, Wis., a unit of Fiserv Inc., announced the addition of installment loan functionality to its Loan Servicing Platform. The platform now provides accounting, secondary marketing and default management support for all mortgage, home equity line of credit, personal credit line and installment loan products.

The rules-driven loan administration platform gives financial institutions the ability to configure support for fixed-rate, variable rate, interest-only and optional payment loans, as well as define promotional interest rates and minimum payments. Its line of credit functionality also includes the ability to rate-lock portions of credit lines and access funds via credit card draws.

Fiserv Lending Solutions also launched SourceTrac, a configurable consumer-direct lending portal that allows mortgage bankers to enhance their Web presence to provide customer service to borrowers and improve lead capture capabilities. SourceTrac will be integrated across several of Fiserv Lending Solutions’ product lines including, Del Mar Database’s DataTrac, a back-office processing service, and the easyLender and UniFi PRO loan origination platforms.

More information: www.fiserv.com.

topLingo Creates Online Mortgage Marketing Toolkit Portal
topLingo Inc., Irvine, Calif., a Web-based application programming services company for the mortgage banking industry, launched an online Marketing Toolkit portal for its client Silver Hill Financial LLC, a national real estate lender specializing in small-balance commercial loans.

The online Marketing Toolkit, available via Silver Hill's Web site, offers its mortgage broker customers the ability to create, customize and download branded marketing materials in pre-press quality to their desktop for printing anywhere, internally or externally to printers such as Kinkos.

More information: www.toplingo.com.

Overture Launches Decision Network
Overture Technologies, Bethesda, Md., a developer of automated underwriting systems, launched the Overture Decision Network, an on-demand network of eligibility, automated underwriting and pricing decision content for lenders, conduits and correspondents. 

Through the network, investor program guidelines and rate sheets are first tested and certified by the investor, then stored in the Overture Decision Library, where access is granted only to those entities with permission to access the information. The network is designed to help mitigate the losses incurred by misinterpreted, inaccurate or inaccessible investor data. 

More information: www.OvertureTechnologies.com.
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