The Lake Mead Effect In The Current Mortgage Lending Environment
By Neal Shinkle, Fraud Consultant
Mortgage Lending In a Time of Evaporating Volume
By now we’ve all seen the pictures. Unnerving images of the mountains rising above Lake Mead, stained with reminders of water levels from years-gone-by. The historically low marks cause obvious concerns…fewer folks using the lake for recreation, a reduction in drinking water and agricultural irrigation, and the recent exposing of disturbing remains.
Perhaps most concerning is the possibility of the lake reaching ‘deadpool’ status. Deadpool occurs when the level of water is so low that it would no longer be able to flow downstream from the dam. That means, not only no more water downstream, but also no more hydropower being produced for the many states that rely on it today. In other words, the mighty lake engine that keeps so many people and industries running would be ‘out of business’.
Mortgage Lending Parallels
The similarities to mortgage lending are fairly clear. Recent developments such as home appreciations and sharply rising interest rates have caused lending volumes to be at historical lows. Those lows have, and will continue to, expose some of the defaults and fraud that have been hidden below the surface.
For some lenders, increasing bad rates aren’t their biggest concern. The possibility of reaching deadpool status is very real. Much like occurred in 2007/2008, extremely low volumes can cause a lender to lack the sufficient revenue to keep its business operational. Many had to shutter their doors back then. Some have already had a similar fate this time around as well.
Unlike lakes that have to rely on favorable weather to restore volume, mortgage lenders have some control over their environment. Some will begin expanding their ‘buy box’, looking to service customers in lower FICO ranges, those with higher debt-to-income ratios, or those with higher loan-to-value ratios. Others may also offer different products, such as adjustable rate or longer-term mortgages. Still others may change their business model (e.g., adding correspondent lending, etc.). These business adjustments all have the potential to increase and restore much-needed volume. Understandably, these may also bring increased risk.
Mitigating the Risk and Leveraging the Opportunity
The good news is that there is a way to manage the risk while expanding the pool of potential borrowers. The key is to leverage proven data-based, artificial intelligence models. These models are incredibly powerful at not only detecting the riskiest applications that may need further scrutinization, but are also excellent at identifying the applications that present the lowest risk. It’s this low-risk volume that is particularly valuable right now. Increasing lower-risk borrowers in an expanding customer base is exactly what lenders need as they look to maintain, or even grow, volume. Lenders have choices. They don’t have to just sit and watch volume evaporate.