Preparing for the return of the jumbo lending market and the days when Fannie Mae and Freddie Mac are no longer mortgage finance behemoths, Rancho Financial is wading back into offering stated-income mortgages.
A division of Calabasas, Calif.-based Skyline Financial, Rancho only six weeks ago began originating stated-income loans—where a borrower’s personal income is not verified. Rancho is currently processing about 100 applications with an average request of $500,000, the company said, and is receiving 10 calls a day for a program that has a $1.5 million loan limit and requires loans above $1 million to have a second appraisal.
Borrowers’ bank statements are examined, but not their tax returns or pay stubs. And while stated-income loans have borne their share of blame for the destruction of the nation's housing economy, unlike earlier lending programs that offered stated-income mortgages to high-risk borrowers, the Rancho product is only for the affluent homeowner.
"In the late 1990s and 2000s, no one was regulating anything and you had these loans that were made and sold on Wall Street, and they became known as ‘liar loans,'" says Rancho mortgage banker Craig Brock. "We’re staying clear of that. If someone has several hundred thousand in assets, chances are they do have the money. We’re trying to target smart people who have financial advisers, who have certified public accountants."
But the concern that this product could again be abused permeates the mortgage-lending arena. "Yes, they can be abused, but that doesn’t mean the potential for abuse means [stated-income mortgages] should be taken out of the market place for everyone. That doesn’t seem to be an appropriate response," says Rich Andreano, a partner at the Washington, D.C., law firm Ballard Spahr.
Most of the loans, according to Rancho's Brock, will go to individuals with a loan-to-value ration of 65% to 70% who put down 30% and a credit score of at least 740. A borrower must have a 2-year history of self-employment, a 12-month reserve and a CPA letter or business license.
"If we’ve got all those things, then the chances are pretty darn high that they have the ability to repay," Brock says. "They won’t walk away from a 30% down payment.”
The jumbo space
The generation of this program is unique considering the tremendous amount of uncertainty surrounding the finalization of the Dodd-Frank Act, which is making financial institutions hesitant to inject capital into the jumbo mortgage lending space.
"There’s no financing," Christopher Whalen, a senior managing director at Tangent Capital Partners, said in early April. "In the New York area there is no financing available above $1 million dollars."
But Brock views the program as a catalyst to drive the jumbo market, and reinvigorate the largely dormat private secondary mortgage-finance market.
"We’re like a lot of companies nationwide. The reason why we’re bringing programs like this out is because we’re preparing for the day that Fannie Mae and Freddie Mac don’t exist," Brock says.
"We have a hell of a conundrum right now because not only are we having to prepare now for Fannie and Freddie to not exist, but we’re having to create a whole new conduit for these jumbo loans. It’s a heck of a grind," he continued, citing plunging property values and the Dodd-Frank Act as challenges to the resurgence of the nonagency market.
The unloading dock
Rancho won’t hold the stated income loans on its books. Instead, it sells them to a single portfolio investor (a confidentiality agreement prevents Brock from identifying the investor) who apparently is more comfortable buying these types of loans than the rest of the market.
"They found an investor. Well, they’re lucky," says Ballard Spahr's Andreano, remarking on the loan program. "For the right investor there is a marketplace for it. If you find the lender to do this correctly, these are good products to have. They won’t be large in number, it’s just they won’t be standard. The typical investor’s only going want the mainstream vanilla-type loans."
And Fannie Mae and Freddie Mac aren’t taking them. A spokesperson at Freddie said products with alternative stated income provisions were eliminated from the agency’s guide years ago.
"There’s only one source (taking the loans). Until (PIMCO founder) Bill Gross, until Goldman Sachs (GS) start purchasing these loans again, it’s going to be slim pickings. Until they start buying these things, we won’t see any huge volume," says Brock, who projects originating $50 million to $75 million in stated income loans in the program's first 12 months.
"We’re hopeful that the market’s turning," he adds. "A lot of us are showing confidence. We could be out there grabbing the so-called low-hanging fruit, but we’re trying to show some foresight for when the market comes back and people are involved in buying higher-prices homes."