My post about the return of jumbo mortgage capital was noticed by some newspaper columnists and I spent a bunch of time on the telephone with them last week. Each and every columnist, from the local paper to THE national business daily wanted to know what would happen if the government unwound its involvement in mortgage lending.
My response? Lenders lend. That's how we make money.
Well, that's how lenders USED to make money. These past few years, lenders have been engaged in arbitrage rather than lending. I wrote about how government was crowding out private enterprise and it would prolong the housing finance depression rather than cushion the blow. Thankfully, agency loan guarantees will be lowered this fall and the opportunities are attracting majoy key players.
Is it any surprise that the Wall Street Journal reports that Lew Ranieri is ready to jump on this opportunity?
Yet Mr. Ranieri believes now is the time for nontraditional lenders to enter the market. While the bank-lending standards that created the mortgage crisis were too loose during the housing boom, they are now too tight, Mr. Ranieri says, reducing the supply of mortgages to average borrowers and opening a door for lenders like Shellpoint Partners LLC, a mortgage-finance company he recently founded with two partners.
This doesn't surprise me. I mentioned that I was speaking with hedge funds and investment managers, earlier this year, to measure their willingness to enter the non-agency lending market and the responses were the same; they all want to make these loans but the government arbitrage scheme makes it too profitable to do anything else. I posited that lenders, outside of the new GSE's (Citibank, Chase, BofA, & Wells Fargo) would look to serve those markets soon enough.
Mr. Ranieri sees an opportunity in the alternative-income documentation niche, most notably the self-employed borrower:
The aim is to target borrowers whose credit profiles prevent them from obtaining conventional mortgages in the tight market but who are nevertheless good credit risks and can make a down payment of at least a 15%. The company said a typical borrower could include self-employed contractors and other professionals who have assets and a steady income stream. The self-employed have been the hardest-hit by bank credit-tightening trends.
Returns could be staggering. While most agency loans charge 4.5-5.0% in interest, non-prime loans can charge as much as 9% in interest. Certainly, that kind of margin will attract capital and the spread will narrow in the future but the early providers can expect to reap rewards for their prescience.
We saw this in jumbo lending. Last year, jumbo home loans were as much as 1.5%-2.0% higher than agency loans. Two government-supported banks offered non-government loans and bigger players started stepping in. Today, the margin between agency loans and jumbo loans is but .375%. Jumbo mortgage rates today average just 5.0%.
Lew Ranieri isn't the be all and end all of mortgage lending but he is an accomplished player in this market. With over 40 years in mortgage securitizations, his actions should be a leading indicator of where lending is headed. His most recent activity is a positive sign.