Integration Streamlines and Mitigates Risks of Construction Loan Process

Calyx Software, a leading provider of comprehensive mortgage software solutions for banks, credit unions, mortgage bankers, wholesale and correspondent lenders and brokers, announced today that Path^®, its cloud-based, dynamic mortgage loan origination software (LOS), is now integrated with Land Gorilla, the leading construction loan management software provider.

With this integration, Path clients can now seamlessly access Land Gorilla’s Construction Loan Manager™ to manage and streamline the digital draw process, loan servicing, and payment transactions. The Construction Loan Manager also provides Path clients visibility into portfolio risk, loan performance and compliance tools—mitigating the risks associated with post-closing draw management.

“Today, everyone involved in the construction loan process wants a digital experience,” said Sean Faries, CEO of Land Gorilla. “That is why we’re excited to partner with an innovative LOS like Path. Our integration provides lenders and project stakeholders with a fully digital and seamless experience. For example, lenders can now deliver a customer-centric experience that will allow borrowers and their builders to manage critical tasks associated with their project, such as draw requests, change orders, budget balances, electronic signature processes, lien controls, inspection requests and document management.”

"Land Gorilla has become the leader in construction loan management software because it brings simplicity, speed and transparency to the construction loan process," said Bob Dougherty, Executive Vice President of Business Development at Calyx Software. "Our integration with Land Gorilla will help lenders that offer construction loans gain efficiency, reduce risk, and ultimately become more successful and profitable.”

 

 

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In the second session of the day at IMN’s Mortgage Servicing Rights Forum executives from lending companies talked about their MSR and lending strategies coming off last year’s low origination environment.

Cutting costs to protect the bottom line was a natural strategy. But because several had already moved to a variable cost model a lot of the processing and other costs went away naturally. The other common thread was that they all turned to data, in different ways, to better manage their business. Aaron Samples, CEO of First Guaranty Mortgage Corp, commented “We have become very discipline in terms of how we measure business. We have gotten granular as we measure all the way down to loan officer production and account production and the volumes we were doing relative to costs. We want to be disciplined but we want to be opportunistic as well. Our plan is to lay out the plan that we implemented in 2018.”

[caption id="attachment_11840" align="aligncenter" width="300"] Chris Mayer, CEO, Longbridge Financial; Kevin Brungardt, CEO Roundpoint Mortgage Servicing Corp, Aaron Samples, CEO First Guaranty Mortgage Corp; Lee Smith, EVP/COO Flagstar Bank.[/caption]

“We didn’t chase the prize or do irrational things” said Lee Smith, EVP and COO of Flagstar Bank.  We focused on loan performance to make sure we have good targets in terms of volume and profitability, we wanted to make sure we had producers that were producing. Finally, in terms of positioning us for where we are right now, we were fairly successful with our teams and LO’s in 2019. Certain teams from other companies were disenchanted and we were successful in bringing some performing teams on board.”

For Roundpoint Mortgage Servicing Corp the rise in interest rates last year caused a lot of operating and liquidity needs for their counterparties. To address this last year they started having regular  conferences with them. As Kevin Brungardt, the CEO, said “ As a result of that experience we started building out dashboards with metrics including products and funding, default metrics, prepaid risk and counterparty risks. As a liquidity provider though, you have to be thoughtful. If you cut off liquidity you, in a sense, accelerate counter-party risk. We only do business  with counterparties that have lived through a full cycle.”

The reverse mortgage business took many of the same hits are the overall mortgage business last year, but for different reasons. Rates weren’t the issue; their borrowers aren’t very rate sensitive. In October 2017 the U.S. Department of Housing and Urban Development, which oversees the HECM program, issued changes to strop the programs perceived drain on the Federal Housing Administration’s Mutual Mortgage Insurance Fund. These changes altered the underwriting criteria, limiting the amount of equity a borrow could access and making it harder to qualify. Consequently, they significantly reduced the volume for reverse mortgage lenders like Longbridge Financial. “We focused on efficiency in originating and built out the wholesale business and worked with people who were relatively new to reverse mortgages.” Said CEO Chris Mayer. “We actually saw growth over the last 12 months. People are moving away from government programs. We have one proprietary program and are rolling out more. We, and the industry, were tied to the FHA and we are now breaking out of that.”

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[caption id="attachment_11837" align="alignleft" width="300"] Dominic Purviance, Federal Reserve Bank of Atlanta[/caption]

At IMN’s Residential Mortgage Servicing Rights Forum today, a roundtable discussion on The Economy, Interest Rates, the MSR Market and its Supply/Demand Dyanamics and Cycle” underscored what the focus was when assessing MSR’s.

Mike Carnes, managing director at MIAC, put the value of outstanding mortgage servicing rights ( MSR’s) at 5.6 trillion. Of this, 2/3 were originated prior to 2017. “These loans are largely out of the money. Rates would have to fall substantially for these loans to refinance. Most of these people have had the opportunity to refinance and decided they didn’t want to.”

While interest rates affect MSR valuations, there are other factors as well. The shortage of housing supply across the nation over the last several years has created upward pressure on housing prices. What concerned Domonic Purviance, senior financial strategist at the Federal Reserve Bank of Atlanta, was the level of affordability. “ When housing becomes unaffordable that’s when we see adjustments on the type of mortgages  being originated. We see downward pressure on affordability. The increase in rates at the end of last year caused a correction in demand which indicates we don’t have as much of a market as we once had in terms of affordability.” This would also explain why there is expected to be a 400% increase in non-QM lending this year.

“A couple of patterns that we see.” said Domonic.  “Over the last two years as home prices have increased the mortgages originated have had a higher DTI ratio. Starting with 2014, we started to see a lot of the mortgages originated with a higher DTI start to go delinquent at a more rapid pace. If you look at FHA originations, 56% in 2018 had DTI of over 42%, a good portion had over 50%. That tells me that the consumer is taking on a lot of debt. As debt to homebuyers increases so does the DTI and so does the foreclosure rate. As interest rates go up  consumers will be stretched and delinquencies will go up. That is the risk I’m concerned about. And increasing home prices just exacerbates this.”

The risk also seems to be layering. According to Mr. Carnes 24% of new FHA issuance is as low as 640 fico. So we are also seeing a slippage in FICO. There are also new non-QM loans being rolled out that are starting to offer alternative income options ( ie bank statement loans) and higher LTV’s.

To possibly address some of this, on March 15^ththe FHA announced changes to its Total Mortgage Scorecard. While the exact nature of the changes hasn’t been announced, there are indications that loans with a 640 FICO or lower and a DTI of 50 or higher would need to be manually underwritten.

Another member of the panel , Edward Pinto, co-director and chief risk officer at the American Enterprise Institute, had this to say about the FHA’s move. “The good news is they took the step, the further good news is that they took the step during the boom, which is unusual, and they made it effective immediately, which is also unusual. From an MSR perspective this could be a significant event. On the positive side, it’s harder to refi a loan that has a 50% DTI or 630 FICO going forward. So there may be a slowdown in prepayments on the FHA side.”

Mr Purviance then restated his position on debt to income as the thing to be concerned about. “I’m more concerned about DTI than FICO scores because even if you have a good FICO score, if you had a high DTI and there is some kind of economic distress, you won’t have a good FICO for long. So the consumer overall, even if they have good FICO today, won’t have it tomorrow if their debt levels are high and you have economic distress. The GSE’s are also increasing their level of high DTI originations. The percentage is smaller than with FHA but it demonstrates where we are in the cycle. Home prices have increased while income hasn’t so the consumer has to take on a lot more debt to pay the bills.”

As for servicing values, Mr Carnes said that MIAC sees some FHA pools trading at 4, others almost being given away. There is a big disparity in FHA pricing, more so than the GSE’s, that is driven in part on the predictive models used to forecast default levels, models which use things like FICO, DTI, spread time of origination, has the asset been delinquent in the last 12 months, HPI, unemployment and other factors.

 

 

 

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