Industry debates can create noise and miss the real story and that blind spot is one this episode of Ten Minute talks looks to shed light on. Jennifer McGuinness, Chief Executive Officer of Pivot Financial, joins HousingWire’s Allison LaForgia to cut through misconceptions about non-agency lending, why diversification across loan products is rising and what lenders should consider before labeling a loan “high risk”.
From credit bureau competition to score model discrepancies and policy ripple effects tied to Federal Housing Finance Agency and Mortgage Bankers Association initiatives, this episode reframes today’s mortgage myths with facts, context and sharp analysis designed for decision makers.
#MortgageTrends #NonQM #LoanServicing #PivotFinancial
From credit bureau competition to score model discrepancies and policy ripple effects tied to Federal Housing Finance Agency and Mortgage Bankers Association initiatives, this episode reframes today’s mortgage myths with facts, context and sharp analysis designed for decision makers.
#MortgageTrends #NonQM #LoanServicing #PivotFinancial
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NewsTranscript
00:05I'm Allison LaForgia, Managing Editor of HousingWare's Content Studio, and on this episode of
00:1110 Minute Talks, I'm with Jennifer McGinnis, who is the CEO of Pivot Financial, and I'm going to
00:16pick her brain about what's going on with the industry. So, Jennifer, thank you for joining
00:22me today. Thanks for having me. Glad to be here. So, I'm so excited that you were willing to give
00:26me time today, because I feel like your LinkedIn is sort of myth-busting for the industry. Okay.
00:33And I find it to be really refreshing, because I think that sometimes, a lot of times, most often,
00:40your take is just talking about what we should actually be talking about instead of screaming
00:44about headlines. Yeah, I'm not really a drama queen. I think most people know that. I'm more of a factual
00:50base, let's do the work, figure out what the right answer is. And after you do the work, if I'm
00:54wrong,
00:55I'll be happy to say that I'm wrong. So far, I'm not wrong. And if we want to call it
00:59myth-busting,
01:00I'm good with that. I think it's just more about, let's see what we're supposed to be working on.
01:05Right. And I think that's clearly one of the reasons you've been doing, you've been everywhere
01:09recently. I mean, you have this crazy travel schedule coming up. You moderated a panel today,
01:14yesterday at MBA, servicing. Talk to me a little bit about that panel that where you were talking
01:20about non-agency servicing. Yeah. So the panel yesterday was actually
01:25very complex and in-depth. We did unique challenges of non-agency servicing. And one of the things I
01:31really wanted to get across on that panel is non-agency does not mean non-QM. And not every
01:37non-agency product is non-QM. Heck, not even bank statement loans are not always non-QM. So we chatted
01:45with four leaders from different servicers, phase servicing, BSI, PHH, and Davenbule were on the
01:56panel. And it was, you know, the five of us really digging deep. And we had an interactive audience.
02:02There was a lot of Q&A. And we touched upon DSCR, bridge, fix and flip, ground up construction,
02:06first and second lien, HELOC, closed end second liens, and also HEI agreements. And, you know,
02:14where the pitfalls are for servicing, what are the challenges. And also, you know, in originating
02:19those loans, you know, they're not bad products. I think a lot of people put anything non-agency in
02:24a riskier category. Actually, they're not riskier if you're originating a good loan with good credit
02:30thought process. And, you know, I really was interested in helping to have that discussion.
02:36And we had a cool audience for it. It sounds like the audience really liked it. I know that our
02:40newsroom
02:40is very interested in talking to you afterwards about some of the insights that came out of that
02:44panel. But I want to continue in sort of that myth-busting lane, because I know that you've
02:50said you're not really, you're not, your LinkedIn is not meant to be a myth-busting source. But you,
02:57even as you just mentioned, talking about people maybe viewing things as risk, as particularly risky
03:03that aren't, if they're done correctly, what are some trends that the industry at large should be
03:09focusing on instead of noisy headlines? So I think on the loan side of things, diversification,
03:16you know, we've been bottled up so much in an agency-only world for so long now, you know,
03:21sell all your loans to the GSEs or sell them to an aggregator so they can deliver them to the
03:26GSEs.
03:26And, you know, we've seen a lot of pickup now, you know, Jumbo has, you know, increased by 15%.
03:32You know, non-QM is now 13.5% to 16% of the market, or just a short while
03:37ago it was 2%.
03:39And again, though, non-QM, the way that it's classified, I love all my analyst buddies,
03:44but they're classifying as non-QM. It's just non-agency products. The other thing is a DSCR loan
03:50is not a non-agency consumer-facing product. It's actually a resi commercial hybrid loan. So I think
03:59you want to keep that in mind. But all of these products are necessary to service your borrowers
04:04most effectively and efficiently. You know, you may have a borrower that's just outside of a GSE
04:09qualifying. Well, there is a product for that. And it's generally, literally a CUSPI agency product.
04:15And those borrowers don't have to have 50 back-end DTIs in order to, you know, need that product.
04:22So I think that's important. I also would like to see other loan structures come back. There is a
04:27time and a place for an interest-only payment, and that's not evil. That's necessary for certain
04:33borrowers. And, you know, I'd like to see, you know, more creativity come back into the market,
04:38just not in a silly way. For example, I'm going to talk about something from yesteryear,
04:43the pay option arm, you know, the evil loan, allegedly. It wasn't evil for who it was
04:48originally designed for. It's when the market started giving it to everyone that it became
04:52a problem. So again, you rein in the product for the customers that you create it for,
04:57you deploy it that way, and you do it effectively and efficiently, and you have good products.
05:03So specializing the borrower with the product that is most apt for them. And it's interesting
05:10that you say that because a couple of months ago, I think at this point over the summer,
05:15I was talking to Clayton Collins, our CEO, and Clayton said that he thought the age of
05:21the vanilla borrower was dead. He's not wrong. I mean, there's still a lot of borrowers that fit
05:26into a standard agency-type product, but there are other borrowers, you know, especially with the rise
05:32of remote work. There are a lot of people that have more than one job. Certain jobs are differentiated
05:37types of income. You may have one job that's W-2, another that's 1099, another one that's off the
05:42books. And that's not the easiest thing to underwrite in a, you know, a W-2 tax return kind
05:48of way. And you may need to do alternative documentation, but that doesn't mean that
05:52you are a riskier borrower. It means that you have complex income streams. And that's not
05:57necessarily a bad thing. That's somebody who's diversified. That's somebody that in a doomsday
06:03scenario, if they were to lose one of those jobs, is employable in many ways. So in some ways,
06:08you really want to look at that borrower as an upside. So I agree with Clayton. I disagree that
06:12the vanilla borrower is dead. I would say that there are still vanilla borrowers, and then there
06:17are also, you know, chocolate, strawberry, and pistachio ones as well. I think that's a great take.
06:21I think he, we were talking largely about, like, the standard, what you would see
06:30in ages past where you had, like, a simple W-2. Here you go. This is my, this is my
06:35one income.
06:36This is what I want. This is my standard loan. You have this standard closing process. So I think,
06:42I think in that application, it's probably a little more, a little more fair. But to your point,
06:48I definitely think that agency, the traditional products that we see most, for a large portion of
06:55borrowers are going to continue to clearly be possible. Look, I mean, if you can qualify for it,
07:00most people are going to continue with it. However, I think, you know, some of the other
07:05things that are going on in the market could change that for even higher FICO borrowers, you know,
07:10when all of a sudden, LLPAs have to shift in order to accommodate certain nonsense going on in the
07:16market right now. And, you know, I'm hoping we won't get there. But, you know, we'll see.
07:21Speaking of certain nonsense going on in the market right now, I would be remiss to not ask
07:26you a question about what people should actually be paying attention to in the conversation about
07:31credit. Okay. Which aspect of credit should we touch upon? Let's talk about the credit score piece,
07:37because I think that's something that we're debating heavily right now as an industry.
07:42Sure. No, I mean, look, I think, how did we end up here, right? You know, there was an executive
07:48order
07:48that was signed by the Biden administration saying, we need competition in credit scoring.
07:53You know, they felt that there was a monopoly with FICO. And, you know, fast forward, you know,
07:58all of a sudden, you know, nine months ago now, approximately, you know, Vantage gets approved
08:01next to FICO Classic, which makes absolutely no sense. And the reason it makes absolutely no sense
08:06is in 2022, both FICO's newer model, FICO 10T, and Vantage 4 were actually approved side by side
08:14by FHFA. And they put out that notice, right? So now we sit here and we have a older scoring
08:21model
08:22that's allegedly going to be used next to a newer scoring model. And that doesn't make business sense.
08:28In addition, we're now nine months later, and it's still not rolled out. So why are we still
08:32talking about it? Has the decision been made, for example, to put pencils down? I'm wondering,
08:37and I'm sure everybody else is. But let's say we move in that direction. I think there's a lot of
08:41things that have to be taken into consideration. What was the other thing that came out from FHFA
08:46and the GSEs? Lender choice. Lender choice was defined by them as pick one or the other, FICO,
08:56or Vantage. It was not defined as run all of the scores and pick the highest one.
09:01But one of the biggest messages going out in the market right now is, yay, we'll just pick the highest,
09:07you know, credit score. And it's like, no, that's not what the intent of lender's choice was.
09:11But even if that's okay, in some way, in someone's mind, are we doing the right thing
09:18for credit by doing that? The answer is no. Okay. The whole reason the TriMerge exists is credit
09:24reporting in general by creditors is actually voluntary. So they don't have to do it.
09:30You rocked my world when I read that in a LinkedIn post. It, I will tell you, genuinely blew my
09:35mind
09:36as a concept. Yeah. They don't have to report. They don't have to report consistently. They don't have
09:40to report to all of them. They don't have to do anything, right? So the only way right now to
09:46truly
09:47get a full picture or the fullest picture possible is to actually have a TriMerge. In theory,
09:56you could do a BiMerge, but you'd still have to select the right bureaus for that
10:01and do significant testing. But overall, the right answer still is the TriMerge. Now, if we move to a
10:08place where all of a sudden it's mandatory to actually report to every credit bureau and this
10:14and that, now you could actually create real competition with the credit bureaus because now
10:20they'd all, in theory, have the same data. Who can present it best? Who can give it to me the
10:24fastest?
10:24What's the best analytical way to look at this? Et cetera. But are we going to get there anytime soon?
10:29No. Okay. With regard to MBA's request for single poll, you know, we've done a significant
10:35amount of research at Pivot and so have a vast array of research firms. Right now, there's a large
10:41discrepancy between the different credit scoring models. You know, I've seen research that, you know,
10:46varies everywhere from five points to 61 points of deviation. And it's all, you know, against the bell curve
10:53and a normalization. But at the end of the day, even 10 points can move the needle on your LLPA
10:59categories, 20 points, sometimes multiple categories or category and a half, et cetera. So what is the
11:06point of a credit score? Predictability of default. Okay. So if all of a sudden we have different
11:12scoring models pushing scores higher, right, are we now going to be able to use historical modeling
11:19to make assumptions about how loans will perform in the future? And the answer is no. One, there is no
11:26historical in general for one of the two scoring. The other is we have more data now available in FICO
11:3310T. And I really think that that needs to be taken into consideration. It's kind of like, hey, do you
11:38want to
11:39work with, you know, the company that's been around for, you know, 30, 40 years, has been refining these models
11:44for
11:4440 years, right? Or do you want to work with the company that, you know, was looking over their
11:50shoulder as being a partner to them at times were limiting the other entity. And now they've decided
11:55to create a scoring model so that that's a real monopoly. When you take three credit bureaus now own
12:02the credit score. That's what's the word they're using oligarchy, I think, right? That's an oligarchy.
12:09FICO is an independent entity. The three bureaus are three independent entities. You have four
12:15entities today. Are they cornering the market on scoring and actual data? Absolutely. But where's
12:21the company that stood up and said, I'm going to take them on? And, you know, advantage isn't it,
12:27because that's still these same three dudes, right? So I think you want to keep that in mind as well.
12:32It's interesting, because I feel like that's sort of glossed over as an additional talking point.
12:37That's the three bureaus' own vantage. And it's interesting even to see people, the more that they
12:44read, the more that they understand the conversation that we're having. But I do feel, and what I
12:50appreciate you talking to me about, is helping refocus our audience on what they should be paying
12:56attention to instead of all of the noise and this person having one take and this person having another
13:01take. Well, I think the noise is very real. You know, I think that the credit bureaus and also
13:06advantage have been riding a wave of, you know, 1,400 percent alleged pricing increase by FICO.
13:13They've actually increased their pricing more than FICO has in the last few years. And again,
13:18this is just doing the work, right? But the thing that nobody talks about, it wasn't something I
13:23read on LinkedIn, and is why FICO had to increase their pricing. They were stuck in a level pricing
13:31agreement for more than 20 years with the credit bureaus. The credit bureaus, to have a scoring
13:37model partner, literally kept them that way for more than 20 years. Now, at Housing Wire, right,
13:44would you be okay with, you know, having to keep your pricing, your compensation, your subscriptions,
13:50everybody's salary, et cetera, static for more than 20 years?
13:53You think that my BFF Clayton would be okay for having to cover costs at a flat dollar level
13:59for a 20-year duration? And do you think at year 20 in a day, he'd be like, okay, now
14:05I've got to
14:05actually get back some of this money that I've had to put out for this duration of time? Because
14:11inflation is real, costs change, et cetera. And data is significantly more complicated now.
14:16And it's almost like, you know, the bureaus created this narrative. And if you look at when,
14:21and I'm not against Vantage, I've never, you know, waved a flag of who I'm in love with,
14:26quite frankly. But my point is, is, is that fair? And then right at the end of that 20 plus
14:33year
14:33timeline is when Vantage was launched, right? It's almost like the message was created on purpose.
14:40And I don't like seeing that. That is very interesting food for thought. And I think when
14:47you look at it in that context, I mean, you have to understand that, of course, the price would
14:51change. Like I said, data is more complicated. A flat fee for 20 years is absolutely insane. I mean,
14:59when you look at, I mean, if you looked at what houses cost 20 years ago, what houses cost now.
15:05It's a common sense thing, right? Businesses have to stay in business and they also have to be able
15:11to cover their costs and make money. You know, none of these organizations we're talking about
15:16right now are nonprofits, nor have they ever been. So again, I think you want to look at what are
15:22the
15:22fact patterns that led to these results? There was no stub on the credit bureaus and they were raising
15:28their prices the entire time, but yet keeping other cost basis is suppressed, right? More importantly,
15:34though, than the cost, I think, is what makes up these models. And, you know, in the deep dive
15:39research that my research team has done, you know, there are material deviations in these models.
15:45You know, I've got an issue with, for example, they have a prime credit score category advantage
15:51and the baseline on the bottom number on that credit category is 661. A 661 borrower has never been a
15:59prime borrower in any market. And, you know, I think that if we're going to work with Vantage at
16:05some point in the future, I think they also need to learn about the mortgage industry and classify
16:10accordingly. Right. And I think that that's really important as well.
16:14Well, Jennifer, thank you so much for giving me time this morning. I appreciate you helping me and
16:20our audience read between the lines and help us align our priorities to what we should be paying
16:25attention to. I appreciate that and always thankful for the opportunity. And thank you to Housing Wire.
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