Expanding Your Product Horizons

How loan originators have branched out into other niches.

As the lending industry continues to shift to a predominantly purchase market, more originators are looking for ways to increase their revenue stream. In addition to specific products, many originators also have taken a broader approach—adding loan categories such as subprime, home equity lines, and reverse mortgages.

These market niches require more planning and ongoing attention, but they can be profitable and provide a valuable service to customers.

Following is a look at what several loan originators have done to expand their portfolio.

Subprime Market
The subprime market has experienced a series of peaks and valleys during the last few years, but many lenders and originators consider it to be a mainstay of their business. There will always be a pool of borrowers who are in need of a subprime loan, because of their “bruised” credit or other circumstances. According to a recent report, subprime loans account for one in every nine mortgages in the U.S. “There’s never a time when subprime isn’t appropriate,” said Wayne Panniello, president of WFP Mortgage, North Reading, Mass. “There are always situations that people face that make them unqualified for a conventional loan.”

“With purchase business declining and refinances diminishing, you need to replace it with other opportunities and subprime is perfect for that,” agreed Jerry Kaplan, vice president at Cherry Creek Mortgage, Denver, Colo.

Most subprime prospects are aware of their credit issues and are receptive to a higher priced loan. Loan originators have an opportunity to assist them through a difficult time and subsequently convert them to a conventional loan product, thereby ensuring long-term customer loyalty.

Some originators may be wary of taking on subprime business because of its association with predatory lending. Of course, while consumer advocacy groups and other critics have argued that subprime and predatory lending are synonymous, there is a clear distinction to be made, one that originators should understand in order to explain to prospects. Panniello and Kaplan stressed that they haven’t witnessed extensive customer resistance. “It hasn’t been a major factor,” said Panniello. “I haven’t seen anyone (customers) that concerned.”

Panniello emphasized that most of his subprime business is generated through referrals; Realtors, builders, and past customers advise others that he is a subprime specialist. “I inform people (about his specialty) in meetings and conversations,” he said. “I’m trying to educate them that these loans can be done. I don’t want agents and others thinking that a customer can’t be helped because of their past (credit) situation.”

Kaplan noted that a key to success in subprime originating is developing strong relationships with a few “quality” subprime wholesale lenders that will help streamline the approval process. He also stressed that most originators should be able to maintain a combined prime and subprime business. “A lot of subprime business is Alt-A business, and overall it’s not that much different,” he noted. “The main difference is the credit issues.” He added that subprime newcomers might benefit from a support team of experienced processors/underwriters to help them through the transition.

Jumbo Lending
For some originators, tackling the jumbo market may be a question of simple math. If you’re in the right market—with higher priced properties—why not do fewer loans for the same or greater income potential? Current loan limits for jumbos range from $359,651 ($1 over the current conforming limits) to $650,000. The super jumbo category ranges from $650,001 and above (although banks and investment banks often get involved at the higher limits.) Jumbo originators are typically based in or near higher-priced property markets and/or have a niche of resort/second home business. Their customers are a mix of bankers and Fortune 1000 senior level executives, doctors, and attorneys, as well as celebrities and athletes. “This is a viable market for originators, regardless of the economic conditions,” said Kevin Gentry, president of Gentry Capital Services, Stamford, Conn.

Gentry markets to the jumbo borrower segment in a number of ways. For example, he has established relationships with private banking department reps at large financial institutions that aren’t able to handle large residential loans. He also hosted luncheons and other meetings for attorneys and Realtors to educate them about the jumbo market. In addition, he tapped the jumbo relocation market. “From my experience, jumbo borrowers may push a bit more on pricing, but no more than conforming borrowers,” he stated.

A major portion of Marcus Zavattaro’s business is jumbo-based, developed via referrals, mailings, and networking with prospects at community events. Zavattaro, president of Pinnacle Financial, Greenwich, Conn., disputes the notion that jumbo borrowers are easier to work with than other customers. For example, he explains that they are often very aggressive in seeking competitive rates and fees. “The difference for me getting a deal might be whether I’ll pay the appraisal or application fee,” he said. “In the jumbo and super jumbo transactions there are typically lower margins. Jumbo borrowers will drive you harder on getting lower rates.”

He also noted that many jumbo borrowers require additional handholding. “The maintenance level is much higher; they demand more of your time.” Still, Zavattaro pointed out that this has been a profitable part of his overall business, which also includes a healthy share of conforming loans. “I think you have to have a mix of both to be successful,” he said.

Home Equity Lines of Credit
According to a recent Mortgage Bankers Association survey, there has been a major increase in the number of home equity line of credit (HELOCs) applications—a substantial 77 percent in the first half of last year. The size of the average HELOC loan amount has also increased to $83,630 during the same period.

One of the reasons that the HELOC has become so attractive is the recent drop in rates and fees, along with an overall streamlined process. Many banks offer the credit line at or below prime commercial rates, which makes it difficult for mortgage brokers to compete effectively.

Demas Lamas, branch manager of Olympia Funding’s Frisco, Texas office, has been successful with HELOCs because he’s willing to make a little less on the commissions and because he’s found a way to compete with the banks. Lamas handles HELOCs so that he doesn’t lose the business to another originator or lender. He noted that a high percentage of his HELOC borrowers also refer him to others who need a similar loan.

“I think that if you don’t have this as a part of your product arsenal, you’ll be leaving loans on the table,” he said.

Lamas has used fliers to reach potential borrowers. He also suggests postcards and meetings with Realtors to explain how HELOCs can benefit their customers. To supplement the premium he receives from the lender, Lamas usually adds another fee of approximately $600 for his services, including shopping for the best deal. “I rarely have a customer question this,” he said. “They see the value in my trusted advisor role that they may not get elsewhere. I’m helping them understand the value of HELOCs and how they can use one.”

Lamas noted that other originators should be less concerned about a minimal commission, and more interested in the resulting referral business and more important, the long-term impact HELOCs can have on their customer relationships. “If we always tell customers to ‘call us whenever we can help you,’ and then say we can’t do a HELOC for them, eventually they may go to another originator who is better able to meet all of their needs.”

Reverse Mortgages
The popularity of reverse mortgages has increased dramatically during the last few years. Reverse mortgages may not be a staple on more product menus because originators aren’t aware of the basic ingredients, which include:

• Reverse mortgage borrowers receive cash payments and owe nothing on the home as long as they live there.
• There are three main types of reverse mortgages: FHA Home Equity Conversion Mortgage, Fannie Mae Home Keeper, and Financial Freedom Cash Account
• Borrowers must be at least 62 years of age and own their own home. (Some borrowers can use the new mortgage to pay off their home).
• The loan amount is based on several factors, including the borrower’s age, home value, interest rates, and type of reverse mortgage. Generally speaking, the older the borrower and the more valuable the home, the greater the loan amount.
• In most situations, borrowers can receive payments in one lump sum, fixed monthly payments, a line of credit, or a combination.

Those originators who have entered the reverse mortgage market agree that it’s worthwhile but challenging. For example, John Lucas, vice president and reverse mortgage specialist at Pacific Republic Mortgage Corporation in Van Nuys, Calif. noted that seniors are harder to close than other customers. “A key challenge is the nature of the senior market in general,” he said. “This is especially true with older widows who aren’t confident about their financial situations and are handling major finances for the first time. Some of them are understandably skeptical.”

Lucas has used direct mail to market his reverse mortgage niche, but said that advertising in senior publications has been most effective. In addition, he has an extensive network of financial planners, CPAs, attorneys, and senior center directors. “They know that I’m a specialist and will call when they meet clients who have a need, including their own family members,” he said.

Julie Okragly, vice president and mortgage consultant at Intermountain Mortgage Company in Billings, Mont., advertises her reverse mortgage specialty with radio, bus bench, and magazine (senior publications) advertising. She’s also been featured in a series of newspaper articles on reverse mortgages, and highlighted in a bank’s monthly customer statements. “Realtors also have been a major source of referrals,” she said. “A good place to start is with your sphere of influence: attorneys, Realtors, CPAs, and financial advisors.”

Both Lucas and Okragly stressed that not all originators are suited for the reverse mortgage market. “The lender/originator must be committed to spending extra time with the senior community to show how the program works,” said Lucas. “Many originators don’t have the desire, because they want to close as many transactions as possible. However, if you enjoy the satisfaction of doing a job that can change a person’s life, reverse mortgages may be good for you.”

Okragly noted that it’s possible, but somewhat difficult to do both traditional originating and reverse mortgages. “It’s (reverse) a slower-paced production level. I’ve found that if you want to go with this program, it can’t be about the money.”

She suggested an option for originators interested in being involved on a more limited basis: align themselves with a lender that handles reverse mortgages. The originator can meet with prospects, educate them about the reverse options, and then send the borrower to the lender for the application process. In exchange, the lender will pay the originator an applicant assistant fee (as long as the borrower agrees). “It’s a way to educate more people about the possibilities,” she said.

Getting Started
Whether or not a loan originator should enter a new market depends on several considerations, including their experience, resources, and overall business plan. Panniello underscored the necessity of establishing the proper foundation. “For example, you don’t want to do subprime unless you’re really prepared. Talk to people who have done it, gain the product and other knowledge that you’ll need. Understand the potential problem areas so that you can head them off. Otherwise, you can get frustrated when it doesn’t work out the way you expected.”

Lucas added that the customer knowledge is essential. “You have to know the products backwards and forwards but also understand what motivates customers and needs of clients are that you’re going to fulfill.”

Okragly said that originators need to make sure their past customers are properly serviced when they enter a new field. “You may want to work with a colleague who can take over for some of the other business while you’re developing the new market,” she said. “You don’t want to drop the ball with your past customers.”

Originators should concentrate on one new area rather than spreading themselves too thin, according to Zavattaro. “Become the expert,” he said. “Know everything about it. Customers appreciate this.”

In addition, Kaplan advised originators not to be intimidated about entering a new product arena. “Don’t be afraid,” he said. “If necessary partner up with someone who has done it before. Find a mentor.”

There are a number of factors to evaluate before embarking on a major new niche or market direction. The aforementioned originators have suggested a few of the basic directions. The key is to conduct your own research and determine if these or other niches are right for you and then take the appropriate steps so that you can have another source of business during a competitive lending environment.