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Jumbo Mortgage Market Attracting Proven Key Players

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.

 

 

 

Proposed Good Faith Estimate Should Be More Consumer Friendly

The Consumer Financial Protection Agency just released its proposed Good Faith Estimate (GFE) disclosure form.  The form will combine the best parts of the original GFE (which we still issue) along with the "new" GFE (which is confusing and we issue, per disclosure regulations).

This six-minute video will walk you through it:

Owner-Occupancy Ratio in Condominium Complexes

"A big Bank in America declined my loan application because the condominium complex owner-occupancy density was too low.  I have great credit, five times the payment in monthly income, and I"ve saved my own money up.  How can I get a mortgage to buy this condominium?" 

Let's start by explaining why the big banks in America are declining these loan applications.  While you are an excellent borrower, the collateral, in this case, the property, is part of a  common-interest development (that's lender-speak for condominiums, co-operatives, and planned unit developments).  What that means is that the property you are purchasing is subject to a layer of "opt-in governance" and the composition of the "opt-in entity" could have material effects on the value of the properties in that "opt-in entity".

That was a lot of fancy speak for this statement; a high percentage of renters is less desirable because the owners of the property (investors) have less "emotional interest" than  owners who would make the property his/her home.

Stated differently, an investor-owner is less likely to pay his/her HOA dues, if he/her ran into financial difficulty, than an owner who makes the property his/her home.  It's a risk factor.

Does that mean its a dead-deal?

Absolutely not.  We can make loans on those condominiums if the purchaser puts 25% down payment and plans to make the property his/her home. 

If the property is approved by the Veterans Administration, and the buyer has eligibility for a VA home loan, the owner-occupancy issue is a moot point; the VA doesn't consider owner-occupancy to be a risk factor.

If the buyer wants to pursue an FHA loan, and the complex needs FHA approval, the owner-occupancy density  must be 51%.

Owner-occupany is not the only reason a property in a common-interest development might be declined for high, loan-to-value mortgages.  HOA financial stability, pending litigation, reserve and repair plans, and general maintanance all come into play.  I'll discuss those, in more detail, on this site, later.

Jumbo Mortgage Products Accelerating to Meet Demand

I'm often called a "radical capitalist" because I have a belief in free markets.  No, I'm not talking about the faux mortgage "market", where banks make loans, package them up to get government-agency guarantees, and sell them to Wall Street, who will come begging for bailouts when they lose money.  I'm talking about unencumbered markets.

Time Magazine explores what life will be like after Fannie and Freddie are buried (they're already dead).  As usual, it appraises the situation mostly wrong, repeating the oft-beleived mantra that housing is too important to leave to the private sector.  What I found, when I started my search for private-money mortgage capital, contradicts the Time articles' prognostications:

Fiction: Everyone will have to put 20 percent down.
Fact: Lower down payment options will always exist.

Time Magazine got this one right.  Private mortgage insurance companies are already rolling out products which insure loans down to 5% down payment options, here in California.  We've come a long way since 2009.  Jumbo mortgages are available with as little as 10% down, up to $1,000,000.  This was all private market solutions.

Fiction: The homeownership rate will plummet.
Fact: The government will probably not be getting out of the mortgage business, so any declines in homeownership will be due to changes in consumer sentiment, not access to loans.

Time got this one 100% wrong.  The Dodd-Frank financial overhaul bill is abysmal.  The newly created Consumer Financial Protection Agency is leaderless, other newly created agencies have no sense of direction, and the Federal Reserve compensation restrictions have every bank complaince officer scratching his head to understand how to best implement them. 

Until those regulations get repealed, and political sentiment says they will be repealed , home ownership rates will continue to plummet.  When government gets out of the way, and stops insuring the bad lending decisions which poorly run banks make, the healthy banks, credit unions, and hedge funds will meet consumer demand, and offer profitable products.  Lenders lend; that's how they make money.

Fiction: High-end homes will become harder to buy.
Fact: Conforming loan limit changes will affect a small sliver of the market, a sector of housing consumers who can afford to get jumbo loans on the private market.

Time Magazine got this partly correct.  As conforming loan limits revert to $417,000, this October, even more private lenders will step up to meet the demand of the Southern California market.  As stated earlier, we already have a 10% down payment option for home purchase up to $1,000,000.  When banks see there is demand in that $1,000,000 to $2,000,000 price range, they will make loans.

The frozen jumbo mortgage market is thawing.  It's still frosty, and hardly free flowing, but demand is there.  When demand for capital is there, and a buck stands to be made, supply of capital will readily flow.

Low-Income Housing Proposed for Solana Beach. Junior Lifeguard Program Could Be Affected

The Solana Beach Junior Lifeguard program may not be assembling in the S. Sierra Ave parking lot in the future.  A low-income housing project is being proposed for the current drop-off site for the Junior Lifeguard program:

The three-level building would have a 1,300 square-foot market on the ground floor, and 10 housing rental units above. The site is now a parking lot with 31 spots, used heavily for beach access and for the junior lifeguard program. A lot with some underground parking with 54 spots is proposed.

"The Pearl" will be a mixed-use development, with a small market and ten housing units which can house up to 44 people.  Ginger Hitzke is the Temecula-based developer.  Her work history includes various "public/private developments", as a Vice President with the Affirmed Housing Group and now, as a lead developer with Community Collective.  From her website:

We started our careers working on the most challenging, politically charged rental projects for the lowest income familes (emboldened by the author).

Solana Beach really doesn't have a choice in the issue; the City has to do something becuase this wealth-redistributiuon scheme was mandated by the State of California.  The projects are politically charged because this is a classic use of Rotarian Socialism (or crony capitalism).  In this case, the State mandates that cities build low-income housing, funded by taxpayers, and politically-favored individuals get the contracts to build that housing stock.  Financing is easy for such projects because the rents are usually guaranteed (by the taxpayers) under Section 8 Housing rules.  Approvals will be fast-tracked through the Coastal Commission and City zoning because of the State mandate.

While free-market developers, wait for years for project approvals, risk their own capital, and pray that developer financing becomes available from banks, those "politically charged" competitors feed at the public trough with projects which are essentialy arbitrage plays, not entrepreneurship.

Solana Beach Councilman Dave Roberts sees this as an excellent opportunity to add some union card holders (his base) to the Solana beach voter roster:

He said the city has been sued in the past for not offering enough affordable housing, and a project like this would save taxpayers hundreds of thousands of dollars in avoided legal fees and allow the city to continue providing services for residents. Roberts said the housing would be an opportunity for police officers and teachers to live in Solana Beach, an area they otherwise could not afford. (emboldened by the author)

Roberts' statement shows his ivory-tower thinking.   Cops and teachers usually make more than the income limits of low-income housng rentals unless...

...the fix is already in.

Alternative ideas for this project (since we are mandated to this wealth-redistribution scheme by the State) might include:

1. Give Solana Beach  residents first right-of-refusal to invest in the project.  This project, like all Rotariian Socialist schemes, is a guaranteed profit machine. I'd much prefer that my neighbors make that guaranteed profit so that it is reinvested in Solana Beach businesses and churches.  You know...Shop Solana First.
2. Search for a Solana Beach developer to build the project rather than a politically-connected outsider.  There are a lot of talented builders and developers, in Solana Beach, with better track records, than the Riverside County developer.
3. Address the problem presented by the State mandate once.  Solana Beach is mandated to build 150 low-income housing units, over the next ten years; this project only addresses 7% of that mandate.  You have to ask yourself if this is really the highest and best use of this land and if we can meet the State edict by developing a larger project elsewhere in the City.
4. Consider offering preference to disabled veterans.  The three wars, our country pursued over the past ten years, has given us a substantially large number of disabled veterans, many of them in San Diego County.  What better statement could be made, to the County which houses the largest number of military veterans, than to say that Solana Beach will be the leader of "Operation Home"?  Solana Beach should be known as the epicenter for helping our veterans' transition to civilian life.

The wealth distribution scheme, that is low-income housing. is a violation of ownership of private property, as is secured by our Founding Documents.  The State of California has seen fit to violate that principle and socially game the system to politcally-favored people.  As distasteful as this unconstitutional mandate is, we're stuck with it.  We might as well make the best of it, for the benefit of our residents and veterans, rather than feeding the wealth-eating machine.

FOLLOW UP THOUGHTS:

Why Build “The Pearl” in Solana Beach When Buying Existing Resale Housing Would Save Taxpayers Money?

Excerpt:  The City of Solana Beach could make a public announcement that it intends to purchase ten homes for less than $550,000, offer a 4% co-brokerage fee, and suggest that it will give preference to short sales or foreclosure situations,  My guess is it would be flooded with offers to sell.

Jumbo Mortgage Rates Report- June 13, 2011

News which affects Jumbo mortgage rates:

International:  China says U.S. is already defaulting on its debt.  This has profound implications because it portends higher interest rates (in general) and higher mortgage rates (specifically).  Ironically, the Chinese seem to be echoing the tea party call for budget cuts rather than raising the federal debt limit.

National:  The US "War on Drugs" is failing and its costs contribute to federal spending.  Former Secretary of State George Schultz and Former Federal Reserve Chairman Paul Volcker point out that our domestic policy has inhibited governance and economic development.

California:  Is your neighbor pulling a fast one, by "short-selling" his home, only to by it back a year later at a much reduced price?  Lew Sichelman answers this Palm Springs home owner about the how the practice of flopping may catch up with the seller...down the road

Jumbo Mortgage Rate Indications, as of June 13, 2011:

• 5/1 ARM----------4.000%/4.210% APR
• 7/1 ARM----------4.375%/4.571%APR
• 10/1 ARM---------4.625%/4.807%APR
• 30 Yr Fix----------5.125%?5.557%APR

Jumbo mortgage rates quoted are for loan amounts from $700,000 to $2,000,000.  Credit, down payment, and income restrictions apply.  Not all will qualify.  Equal Opportunity Lender.  NMLS ID 339261

Jumbo Mortgage Capital for California

Much of my time, since April 16, 2011 has been spent meeting with secondary mortgage market investors, to develop a jumbo mortgage product.  We see a good opportunity to serve a neglected niche of people by developing relationships with "private capital sources":  credit unions, hedge funds, pension fund managers, and private investors.  We think, as much as the government has hijacked the lending business, that there is private sector capital willing to lend money for the right yield.

This project is a byproduct of a conversation I had with Anthony Randazzo, at the Reason Foundation dinner in Laguna Niquel.  Mr Randazzo is one of the leading voices in Washington DC in the effort to kick the government out of the mortgage business.  He explains why a truly free mortgage market is not only just policy for the taxpayers but is the answer to long-term stability in housing:

At a hearing in February, Mr. Frank changed his tune, calling for “abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance.”

He’s half-right. The answer is to abolish Fannie and Freddie. But the government should stop there. We don’t need a “whole new system of housing finance.” The federal government doesn’t need to be involved in the mortgage business at all. Plenty of healthy, viable banks are willing to do that.

The central role that Fannie Mae and Freddie Mac played in the financial crisis shouldn’t be ignored. Without the lowered lending standards at Fannie and Freddie, mortgage originators would have paid more attention to the loans they were issuing, because the risk wouldn’t have been shifted onto taxpayers so easily. And without the failure of Fannie and Freddie in September 2008, the market might not have destabilized, leading to the bankruptcy of Lehman Brothers, the quasi-nationalization of AIG and, eventually, the bailout of the financial industry

I thought I was the lone capitalist voice in a market dominated by Wall Street welfare queens.  Naturally, Randazzo's work inspired me to action.   Yesterday, World Wide Credit Corporation  organized a division to provide "capitalist solutions" to the California mortgage market and we named it Jumbo Mortgage Capital.  We've identified non-traditional lending sources, normally eschewed by most local lenders, and can offer the following products to California home buyers and owners:

• fixed-term ARMs, for loan amounts up to $4,000,000 (fixed terms range from 3 years to 10 years)
• 30-year fixed-rate loans for loan amounts up to $4,000,000
• stated-income jumbo mortgage loans for loan amounts up to $2,000,000
• stand-alone Home Equity Lines of Credit up to $500,000
• jumbo mortgage solutions, with just 10% down payment, up to $1,000,000

Stay tuned for more information here.