Carrington’s Brousseau: New nonprime loans are not repeating the mistakes of the past
Q & A
Ray Brousseau, President of Carrington Mortgage Services
Ray Brousseau is president of Carrington Mortgage Services, a residential retail and wholesale lending subsidiary of Carrington Holding Co. Brousseau has more than 30 years of experience in mortgage banking and consumer finance. Carrington Mortgage Services, based in California, was founded in 2007 as a subsidiary of investment management company Carrington Holding Co.
Carrington Mortgage Services is one of a growing number of lenders that are trying to target the so-called nonprime market ― or borrowers who are shut out of conventional and government-agency lending because of poor credit or other financial difficulties.
We talked with Carrington Mortgage Services’ President Ray Brousseau about the company’s most recent loan program and how it’s different from the pre-2008 subprime loans. The California-based lender is certain that the company’s guidelines ensure full documentation of these loans, but they rely on the underwriters’ discretion.
Carrington’s new non-agency loan program is geared toward the nonprime market. What does “non-agency” or “non-prime” mean, and why did you decide to create this type of program?
Four years ago, we said that we want to be the lender you come to for loans that are tough to get, because we knew we had the expertise to underwrite the loans correctly. We’ve been very successful in that market. Today, more than half the business we do falls into the category of underserved, or [borrowers with an] under-650 FICO [credit score]. But all the loans we’ve done up to this point have been what we call QM, or qualified mortgages. And they’re qualified mortgages because they meet the underwriting criteria of one of the agencies, whether it’s Fannie Mae and Freddie Mac, FHA [Federal Housing Administration], USDA [U.S. Department of Agriculture] or VA [U.S. Department of Veterans Affairs].
However, not every borrower can meet those guidelines, so … we’ve also been trying to design and roll out a non-QM program, which we’ve now done. It’s really just the normal evolution from what we were doing, which was all QM lending, to now expanding it to non-QM [lending]. There is a subset of borrowers who may not qualify, for FHA, VA, USDA. Our non-prime programs are another set of products to offer them to help us continue to serve the underserved.
What type of borrower can the new program serve?
If you think of the folks impacted from the recession of the last decade. You had folks with upside down mortgages that they couldn’t sell, or they lost their part-time job or overtime. Or they didn’t have equity in their home because the housing market tanked, so they couldn’t sell it, and they went through a short sale or a deed-in-lieu-of-foreclosure or some other type of significant housing event. Those are the types of the conditions this new product offering is designed for. Bad things happen to good people … and oftentimes folks may not make the best financial decisions when those types of life events take place.
Borrowers who have experienced these types of life events may not have the credit criteria to meet the guidelines for government loans. But typically, there’s been a housing event, a bankruptcy or a life event that caused one of those things to happen. Those are the types of folks we’re talking about.
What is manual underwriting, and why is it important for non-agency loans like the one you’ve introduced?
Manual underwriting is the opposite of AUS, or an automated underwriting system. Most lending today is to borrowers who have FICO scores north of 700. They have very strong credit. Because the credit is very strong, much of the decision-making is done by an engine, a machine, which is fine for your customary, traditional, conservative lending.
But when you’re focused on our type of lending, which is to those who are underserved … you really need an underwriter to take a look at those loans, because their FICO scores aren’t very good, and it’s the manual underwrite that requires the underwriter to review that borrower and their circumstances. They review the facts and try to cobble a story together to understand what happened … [and ask], how do we condition the loan in such a way that we’re pretty confident it won’t happen again?
With a manual underwrite, there is no computer that tells the underwriter what to do. (Underwriters) have checklists and guides, and they look at the borrower’s credit report, assets, income and collateral, and gather supporting documentation to validate that the story is an accurate one, and then they make a recommendation based on our guidelines. They have very defined criteria to underwrite to, but at the end of the day, we expect them to use their judgment. Underwriters have a very skilled job. They go through an awful lot of training and certification to become an underwriter. We ultimately expect them to use that judgment to make a recommendation.
How is this loan program different from the subprime loans prevalent before the 2008 financial crisis?
The first thing I would tell you is that not all subprime lending was bad. A good number of us, myself included, and a good number of our management team, ran businesses that provided loans to borrowers who had a hard time getting those loans, just like we’re talking about today. That was as noble a thing to do then as it is now.
The difference is, [back] then, many folks were competing for that business … [but] didn’t have the necessary disciplines and expertise. Today, very few folks are in that arena.
Our founder and CEO, Bruce Rose, made it very clear that we would not make some of the same mistakes others made the first time around. One example of that is we produced our own proprietary education system called “My Loan Detail,” where … regardless of your status, credit or experience, we require every borrower to go through a self-paced online education process that certifies that they understand the terms and conditions of their loan.
All of our underwriters [are] … in-house. They all work in one of four key facilities and they are managed and overseen by senior people in those sites. We take very good care to make sure those assets are protected. The loans we’re talking about here, although they are non-QM … it doesn’t mean they’re not documented. They are fully documented: Credit, income, ability to repay and assets are all documented. So, these loans are fully underwritten … and fully documented. You go back to the past decade, a lot of those loans didn’t have income documentation, underwriting or credit analysis. We’ve learned a lot about what works and what doesn’t work.