3 mortgage-related takeaways about the Fed rate hike

Historically, purchase loans are considered more at risk for material misrepresentations in mortgage applications. Although certain risk product types that used reduced or no verification of applicant’s information are no longer available in the marketplace, this is reminiscent of what happened starting in 2008, when the chickens came home to roost over lax underwriting practices.

This could happen especially within the wholesale and mortgage broker channel, said Josh Migdal, a partner with the Miami-based law firm of Mark Migdal & Hayden, who added that “they need to remember that they’re the gatekeeper of the transaction.”

Mortgage lenders might become soft in their underwriting and quality control practices as they look to keep volume up, particularly in light of the sharp decline in refinance activity. Fannie Mae’s March forecast expects just over $1 trillion in refis this year, compared with $2.6 trillion in 2021.

Mortgage companies, particularly those that have gone public over the past two years, “have a demand to meet revenue targets and things of that nature and as a result, to meet those targets, certain things may be overlooked in the application and approval process,” Migdal said.

There’s another echo of mid-2000s today: that rising home values are obscuring situations where a misrepresentation led to a loan being made. Even in a worst-case scenario, a property sale would be at an amount to cover potential losses.

Minus the no doc loans, “you do have symmetry to the Great Recession in the fact that you have exponential growth of home pricing that’s driven by cheap money and what seems to be infinite money supply,” Migdal said.

Values are still likely to rise for this year, but eventually they will stall, and “then what happens from there [regarding misrepresentation related defaults] will be dependent on a whole host of other economic policy issues,” Migdal said.

The nation’s largest wholesale originator, United Wholesale Mortgage, said it “will always focus on high quality, low risk loans in the guidelines and the processes that we have from our operational perspective and overall risk, [which doesn’t] make those [potential underwriting issues] about a concern from our perspective,” said Alex Elezaj, its chief strategy officer.

To meet consumer needs from rising interest rates, the company has added several loan products to its menu, including one that uses bank statements for underwriting.

“Consumers are being a lot more cautious these days, I think they’re thinking about things a little bit deeper, and making sure that they get the right product and rate,” Elezaj said. “The best way to do that is to allow an independent [mortgage broker] to shop on their behalf and get the best product for them.”