Historically, the “hard to finance” borrower was one with a risk-filled profile, usually consisting of late payments, low or sporadic income, and credit indicators that suggested an unwillingness or inability to manage one’s debts. In the 1970s and 1980s, these borrowers were led to private money investors. Typically, these investors were high net worth individuals building portfolios of first and second trust deeds arranged at very low loan-to-values (LTVs) with substantially higher interest rates. The brokers who arranged these loans were later dubbed “hard money” lenders. As time evolved and credit markets became aware of the huge opportunity that existed in this segment, the “hard money” lenders were replaced with Wall Street firms creating mortgage-backed securities (MBS) and the business was renamed the far more innocuous “sub-prime” or “non-prime.”
In the current lending environment, a borrower who possesses a set of W-2s and a recent paystub more easily fits the criteria of agency or government guidelines, and therefore, is able to secure a loan at a higher LTV with little cash commitment required. However, regardless of high credit scores, lower LTVs and ample liquidity, the affluent self-employed borrower has a far more difficult time obtaining financing due to liquidity issues in the secondary market for non-agency loans. There are numerous reasons why the jumbo borrower faces a greater challenge aside from secondary market liquidity; they include issues that surround income and the ability to document it, luxury properties with values in a state of flux, occupancy, the number of properties owned, acreage and so on.
While the players may have switched positions, unfortunately, the impact remains the same regardless of which end of the spectrum it occurs; the homeownership chain is impaired. Whether it’s the buyer who cannot obtain financing to buy a home, or the seller who cannot obtain financing to move up in purchase price, one without the other will not assist in healing the housing market. The entry level buyer purchases the move up buyer’s home using FHA financing. The move up buyer secures a high balance conforming loan from any number of resources, while the luxury home buyer is faced with few options. The result of this dynamic continues to slow the growth of real estate markets nationwide, coupled with the current employment and economic conditions.
Efforts to bring about a recovery thus far have been centered on agency and government loan programs. Both of which cater to smaller conforming loan balances and fall short of true jumbo loan amounts. Since rates in the conforming loan markets remain at historic lows, mortgage originators, bankers and financial institutions keep a razor sharp focus on production with marketing efforts geared towards refinancing conforming balance borrowers into lower rate mortgages and government programs. Conforming loans work to keep home prices at levels that allow financing to be more easily facilitated. Therefore, it makes greater economic sense for the home seller to lower their asking price to keep it within reach of the conforming borrower, providing them access to a larger population of buyers. This inadvertently creates downward pressure on home values in this segment.
In addition to the complexities of agency and government lending, the Dodd-Frank Act outlined compensation changes for originators that have not been favorable for jumbo mortgage investors. These changes mandate that investors pay a predetermined fixed amount to the brokers and conversely brokers typically pay their loan officers a fixed amount which may be expressed in a basis point percentage of the loan amount. Because the current focus remains on conforming balance transactions, the commission arrangement between the broker and loan officer is often a greater amount than the super jumbo lender offers in lender-paid compensation. Since the take out investor population for these super jumbo transactions is limited and there is often only a single take out investor for a loan with unique attributes, the mortgage banker’s warehouse lender may not allow them to fund this loan on their warehouse facility.
The product that exists for the jumbo borrower today has a much more commoditized feel. Regardless of the investor selected, guidelines all include similar features. Most have loan amounts that top out at $2 million, while requiring a 30 percent downpayment for purchase and income used must be very traditional in nature. Moving past the $2 million loan amount, financing anything other than a primary residence, or a loan request that has any unique attribute will quickly eliminate the vast majority of exits for this product. While financing for this segment does exist, it can be more difficult to locate and will likely not possess terms that are reflective of the borrower’s strong credit scores, liquidity and overall profile. Typically, these loans are consummated by regional banks and community financial institutions seeking to expand their balance sheet or by large investment banks, to retain or attract deposits from their clients.
Brian Swanson, CMB is senior vice president, chief lending officer of residential and warehouse lending for BofI Federal Bank. He may be reached by phone at (858) 764-9988, e-mail
[email protected].
