The growth in nonconforming credit lending is by most accounts extraordinary. Although many refer to this sector as "sub-prime," "B&C" and "home-equity" lending, the Mortgage Bankers Association of America (MBA) has shied away from using these terms in favor of the more accurate term "nonconforming credit" lending to encompass the entire range of mortgage products and borrowers that make up this lending arena.
While volume totals may vary by source depending on how comprehensive one's definition of nonconforming credit, the recent escalation is due largely to mortgage bankers expanding their horizons beyond their traditional boundaries in a quest to remain profitable and competitive.
Borrowers unable to meet their mortgage financing needs through commercial banks, savings and loan associations and mortgage banking companies have traditionally turned to finance companies. Now, in many cases, mortgage banks, mortgage brokers and even commercial banks and thrifts are competing for these borrowers.
In 1996, according to the February 17, 1997, issue of Inside B&C Lending, sub-prime originations grew to $96.5 billion last year from the 1995 level of $65 billion. Significantly, market share of the top 25 originators fell from 59.1 percent in 1995 to 42.1 percent in 1996.
The interest in nonconforming credit lending has been fueled by several factors, including a big appetite on Wall Street for securities collateralized by nonconforming credit mortgages; the growing ability of lenders to assess and price these mortgages for increased risk; enhanced industry technology to service alternative products effectively; an increasing number of borrowers whose level of debt has rendered their mortgages ineligible for purchase or securitization by Fannie Mae, Freddie Mac and Ginnie Mae; and rising interest rates that have pushed borrowers' debt-to-income ratios above a level that meets the agencies' standards. Combined, these factors have encouraged conservative mortgage originators to pursue the high profit margins that have been customary to lenders in this market niche.
The growth in the number of players in this market has affected the industry's interpretation of the various terms used to describe it. Subprime, B&C, nonconforming credit and home-equity lending have different connotations for different players in the marketplace, and which term is used appears to depend on whether the player is a finance company or a mortgage banking operation. Also, a...