Nichification

Nichification

Proliferation in the number of loan, borrower, property, and transaction characteristics used by lenders to set mortgage prices and underwriting requirements.

Nichification is unique to the U.S. and reflects the importance of secondary markets there. Any characteristic identified by investors in the secondary market as affecting risk or cost is priced in the secondary market, and then in the primary market. The following is a partial list of factors used in pricing or in setting qualification requirements.

Transaction Characteristics:
Loan Amount
Desired Lock Period (in days)
Down Payment (as percent of property value)
Term
Prepayment Penalty (if any)

Borrower Characteristics:
Credit Score
Ratio of Borrower Income to Monthly Housing Expense
Ratio of Borrower Income to Total Housing Expense

Property if Not Single-Family Detached:
Two-Family
Three-Family
Four-Family
Co-op (building is owned by a cooperative association in which members own shares)
Condominium (borrower owns unit in a project in which some facilities are owned in common)
Condominium More than Four Stories High
Manufactured (house was not built on site)
Attached (“Twin,” “Triplex,” “Row”)
Planned Unit Development (house is located in a PUD with a homeowners association that charges dues)

Loan Purpose if Not Purchase for Permanent Occupancy: 
Purchase Second Home (Vacation Home)
Refinance
Cash-Out Refinance (loan is larger than old loan balance by an amount larger than the settlement costs)
Investment (home is being purchased to rent out)

Documentation if Not Standard:
Alternative Documentation (borrower wants to provide payroll and bank statements rather than wait for verification of information from employer and bank)
Documentation for Self-Employed (borrower wants to use special documentation requirements available for the self-employed)
No Income Verification (borrower doesn't want reported income to be verified by the lender)
No Asset Verification (borrower doesn't want reported assets to be verified by the lender)
“No Docs” (borrower doesn't want reported income or assets to be verified by the lender)
No Income Ratios (borrower doesn't want income to be used in determining qualification)
Streamlined Refinance (borrower wants the reduced documentation requirements available on refinances only)

Special Borrower Features:

Non-Occupant Co-Borrower (one of the borrowers won't be living in the house)
Subordinate Financing (there will be a second mortgage on the property when the new loan is made)
Non-Permanent Resident Alien (borrower is employed in U.S. but is not a U.S. citizen or permanent resident)
Non-Permanent Non-Resident Alien (borrower is not a U.S. citizen and is not employed in the U.S.)
Waiver of Escrows (borrower wants to be responsible for payment of taxes and insurance)

Numbers of Niches: The number of potential niches is enormous because of all the different combinations of niche characteristics. Software developed by GHR Systems, Inc., which many major lenders use to make pricing adjustments, allows lenders to enter up to 40 million prices for each loan program. Asecond loan program could have a different 40 million. While no one lender uses any significant part of this capacity, in combination the lenders using the system price for several million niches at least.

Implications for Mortgage Shopping: First, shoppers need to understand that no lender operates in every niche, and the narrower the niche, the fewer the lenders. In a survey of 15 national lenders that I once did, I found that all 15 made investor loans on 30-year fixed-rate mortgages. However, only nine of them made investor loans to borrowers who were doing a cash-out refinance, and only four were also willing to waive standard loan documentation requirements. On adjustable rate mortgages, furthermore, the number fell to two.

Second, the lender offering the best deal in one niche is very unlikely to be the one offering the best deal in another niche. In a
study of 13 lenders operating in 19 niches that I did some time ago, I found that 12 of them offered the best deal in at least one niche. Further, no one of the lenders offered the best deal in more than three of the 19 niches.

Third, nichification is a major reason why mortgage brokers have become such a major part of the market in recent years. Since mortgage brokers deal with multiple lenders, usually 30 or more, they are well positioned (as consumers are not) to identify the lenders who operate in a particular niche, and select the best of the available deals.

Finally, in collecting price data from loan providers, shoppers must be sure that they have provided each loan provider with the information required to place them in the correct market niche. Otherwise, the shopper does not know whether the prices apply or not.

Generic Price Quotes: Casual mortgage shoppers who ask loan providers for “their rate and points” will receive a generic price quote: one based on a series of favorable assumptions. Here are typical assumptions underlying generic price quotes:

• The transaction is a home purchase or no-cash refinance.
• The loan amount is below the conforming loan limit ($322,700 in 2003) and larger than some minimum, such as $50,000, which can vary.
• There will not be a second mortgage on the property when the loan closes.
• The property is single-family, detached, and constructed on the site.
• All co-borrowers will occupy the house as their permanent residence.
• The FICO score of all co-borrowers is above some level, often 720-740.
• The borrowers can document that they have enough cash for the down payment and closing costs.
• The borrowers can document that they have sufficient income to meet the maximum income/expense ratios on the program selected. 
• The borrowers are U.S. citizens or permanent resident aliens. Any deviations from these assumptions will call for a higher
 price.