For several years, growth in the mortgage industry was expansive. Mortgage brokers and mortgage bankers enjoyed more than modest profits. As industry professionals, mortgage loan originators enjoyed higher than average incomes. The mortgage lending industry, as a whole, became more visible, more respected, and more organized.
Organizations such as the Mortgage Bankers Association (MBA) and the National Association of Mortgage Brokers (NAMB) had an increase in participation through state level affiliates and individual memberships. Professional education and certification became a primary activity within these organizations, and advocacy and political action also topped the list of priorities for these organizations. As the industry grew, industry regulation and related legislation increased. One of the most significant changes in the regulatory environment included state required registration of mortgage broker firms in addition to licensing of, and continuing education for, individual loan originators. What was significant about the mortgage industry that accounted for expansive growth and extensive regulation? The answer lies in an examination of the business model.
The Old Business Model – Refinance Boom and Subprime Era
The Market - Who were the customers and borrowers? Those who could not qualify for traditional financing that was available at the time: FHA-insured or VA-guaranteed loans. In addition, there was a need for alternative financing for those who could not qualify under Fannie Mae's or Freddie Mac's guidelines, and those who did not qualify for private mortgage insurance (PMI). This new subprime market included buyers who could not afford the standard 20% down payment for a new home purchase, borrowers with nontraditional or non-verifiable income, and borrowers with negative credit histories.
Business Method - Loan originators used a variety of strategies to find customers. One significant source of prospecting was mortgage filings. By searching county records, originators could locate recent mortgage filings, including notices of default (NOD), foreclosure proceedings and sheriff's sales. Loan originators would offer prospective borrowers a subprime refinance loan as a way to cure default and/or avoid foreclosure. These loans were often two-year adjustable rate mortgages (ARM), which would often be refinanced two or three times through the same loan originator or mortgage banker/broker.
Money Sources - Since these borrowers could not qualify for traditional sources of mortgage funding, where did the money come from? Specialty lenders and investors. Companies such as Countrywide B&C Lending, Long Beach Mortgage Company and Ameriquest entered the market as investors in less-than-perfect credit loans, low- and no- income documentation loans, and foreclosure buyout loans. Servicing of these loans were bought and sold from investor to investor, based on pools of performing (and nonperforming) loans, in addition to income and credit characteristics of loan pools. Investors profited by collecting loan payments, selling loan portfolios and by refinancing the two-year ARM loans in their existing pools.
Between 2000-2007 the mortgage business was characterized by a surge in originations of subprime mortgage refinance loans. Since 2007, many of those mortgages have defaulted, and property values have declined, making home sales and rate and term refinances difficult to impossible. Those companies and individuals who intend to survive in the mortgage business may adopt a new business model – assisting borrowers in obtaining loan modifications to avoid foreclosure.
New Business Opportunities - Many loan officers are familiar with the basics of foreclosure prevention, which has traditionally been: "do something before receiving a NOD." That is, originate a refinance loan while the customer is 30-, 60-, or sometimes even 90-days delinquent, and consolidate the first and second mortgages when possible. Two problems that loan officers encounter in the post-subprime era is lack of lenders/investors for delinquent borrowers and declining property values. Mortgage brokers, loan originators and loan servicers now can develop new partnerships centered on loss mitigation and loan modifications as opposed to the old originate and fund model. Since lenders are not investing in new loans or buying and selling loan pools at rates seen in the past, industry professionals must find new ways to prevent foreclosure as a way to thrive and maintain profits, as much as to survive in the mortgage industry. The new and improved loan officer must become a loss mitigation or loan modification specialist. (Read Lending From A Loan Officer's Perspective to learn how a loan officer thinks.)
Loss Mitigation Specialists - Loss mitigation is a business activity or a relationship between a lender and a third party, such as a mortgage broker and their originators, for the purpose of helping borrowers avoid foreclosures. Loss mitigation activities include the short sale or refinance, i.e. negotiating and originating a reduced principal payoff; forbearance agreements, where payments are temporarily waived and paid at the end of the loan or the loan term is extended. Many loan officers already have critical mitigation experience in refinancing delinquent or pre-foreclosure loans. In most cases, loan officers have influenced (if not outright negotiated) forbearance agreements to allow adequate time to originate the refinance loan or purchase loan for a foreclosure investor. The type of mitigation that represents new opportunity for loan officers is negotiating a complete change in all loan terms, or loan modification.
Loan Modification Specialist - Most seasoned loan originators should easily make the transition to loan modification specialist. Loan modification is similar to refinance origination, in that the specialist is negotiating a new rate, term and - in many cases - a new loan amount with the lender. The difference is that there is no exchange of funds or traditional loan closings.
Staying Competitive: A New Business Model
Another significant difference is that the loan modification specialist will work with government-backed programs, such as Hope for Homeowners or Making Home Affordable. Much of the old business model can and will remain the same. For example, county courthouse mortgage and NOD filings are still an important source of information for finding primary clients. Also, referral business will take on a new level of importance. Establishing relationships with banks and existing loan servicers will provide specialists with a constant stream of prequalified needs-based prospects. (Learn more about the government's Home Modification Plan unveiled in 2009 in our article Things To Know About The Home Modification Plan.)
Some of the relationships from the old business model, such as those with appraisers, title insurance agents and closing companies, will become less important as technology replaces traditional appraisal valuations and as servicers use their own attorneys for new mortgage filings. Loan modification specialists and loan processors will need to make the switch from using loan origination software and automated underwriting engines to software specifically designed to create multiple modification scenarios for existing loans. This will also involve learning to use new automated interfaces to share information seamlessly with servicers and lenders.
Finally, companies and individuals remaining in the mortgage business as loan modification specialists must change their basic marketing and sales plan. In the capacity of a broker, it is no longer adequate to offer lenders and servicers another "good" loan for the pipeline, nor is sufficient to offer the customer another "good deal." The successful loan modification company offers lenders and servicers valuable prescreening and modification agreement preparation that reduces workloads so that servicers can get back to what they do best, that is servicing, not originating, loans. Borrowers are frustrated, confused and uninformed how to go about obtaining a loan modification. The successful loan modification company has a pre-established relationship with loan servicers, and is familiar with their processes so that customers are paying for an expected result, not just for a well-written proposal to shop around by themselves.
Keep the Business Legitimate
Research the types of companies, including attorneys, real estate and mortgage companies that are currently offering loan modification assistance. Review the many do-it-yourself software and video tutorials aimed at homeowners. Learn about the existing modification plans that lenders offer, privately and in conjunction with federal government initiatives. Most importantly, know the local, state and federal laws on mortgage modification programs in your chosen area, as they are constantly changing and under scrutiny. Be visible and transparent, not only to prospective customers, but also to lenders, servicers, industry and consumer advocates, and to government regulators.
Since the mortgage business made the change from safe, government-backed lending to high-risk subprime lending starting in 2007, successful originators learned the new subprime business model. As the business took the corrective turn from subprime mortgage failures, successful loan originators and mortgage brokers adapted to the environment, and many transitioned to become loan modification specialists.