As I mentioned in my last post, Option One has switched their underwriting guidelines from subprime to Fannie-eligible only according to this email below. While its understandable, I can’t see how you make a profitable business model out of it right now. There are tons of players who have been servicing the A-paper side of things forever; and new players are going to find it hard to gain any foothold at all.
Why would you send A-paper stuff to Option One if you’re A-paper traditionally goes to Wells Fargo? The only two viable I can think of are 1) pricing and 2) underwriting turn times. Both of these cause big problems for Option One. If the pricing is much better there is little to no profit in each loan; as the margins on agency paper are lean to begin with. Further, fast underwriting turn times typically mean that there is reduced volume and underwriters aren’t busy.
It doesn’t take a math major to figure out that low margin on low volume means low, low revenue. We’ll see how that further complicates the H&R sale to Cerberus.
Here’s the email received from Option One this afternoon:
Option One - Business As Usual
There are many uncertainties in today’s marketplace. Here is what we do know:
The nonprime mortgage originations business continues to be extremely volatile. The only stable source of liquidity is FNMA, which is why we recently changed our guidelines to ensure that all loans we originate are FNMA-eligible. We do not see any improvement in market conditions in the relative near term.
As H&R Block stated in its press release this morning, one option it is considering is the sale of Option One’s servicing business (rather than the entire company) to Cerberus. If this were to happen, then H&R Block would work with us to determine the appropriate manner and timing for H&R Block to divest itself of the origination side of our business. Again, this is one possible outcome, but nothing has been decided by H&R Block.
As of today, we continue to accept applications, fund loans and honor our pipeline.
Ummm….switching from subprime (jumbo too) to agency-only doesn’t sound like business as usual to me; but hey, what do I know?
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[Source: Blown Mortgage]
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