PennyMac, AmeriHome Mortgage, and Stearns Lending have several things in common.
All of them are among the largest mortgage lenders in the country, and none of them is a bank. They are part of a growing class of alternative lenders who now make more than 4 in 10 home loans.
All of them are headquartered in Southern California, the epicenter of the subprime lending industry for the past decade. And all of them are led by former executives at Countrywide Financial, the once-giant mortgage lender that made tens of billions of dollars in risky loans that contributed to the 2008 financial crisis.
This time, the leaders say, it will be different.
Unlike their subprime ancestors, companies maintain they adhere to strict new lending standards to protect against massive defaults.
Still, some observers are concerned about the boom in housing markets across the country and in Southern California, where prices have risen by a third since 2012.
So-called non-bank lenders once again dominate a riskier corner of the housing market – this time, Federal Housing Administration-insured loans for first-time buyers and buyers on credit. These lenders now control 64% of the market for FHA loans and other veterans-like loans, up from 18% in 2010.
A Times analysis of federal lending data shows that FHA mortgages from non-bank lenders experience more defaults than similar loans from banks. Only 0.9% of FHA insured loans issued by banks from October 2013 to September this year were seriously past due – several months overdue – compared to 1.1% of non-bank loans. In other words, non-bank FHA loans are about 23% more likely to go wrong than those issued by banks.
Non-bank lenders: In Section A of November 30, an article on the growth of non-bank mortgage lenders indicated that a review of federal lending data showed that FHA and VA non-bank loans were about 23% more likely to hurt turn than those issued by banks. Data did not include VA-backed loans.
Consumer advocates fear the new generation of mortgage companies, especially those with ties to now defunct subprime lenders, could once again take advantage of borrowers.
“The idea that many of the people who benefited from subprime are now back in action calls for closer examination,” said Kevin Stein, associate director of the California Reinvestment Coalition, a fair loan advocacy group in San Francisco.
The surge in non-bank lending has also sparked concern at Ginnie Mae, a crown corporation that monitors FHA and VA lenders. Ginnie Mae chairman Ted Tozer has requested $ 5 million in additional federal funding to hire 33 additional regulators.
“These companies have grown so fast,” he said.
FHA borrowers can deposit as little as 3.5% of the loan amount and have a credit score as low as 580, which could signal past bankruptcy or debts sent for collection.
Even for borrowers with good credit, smaller down payments add risk. If home prices drop even a little, these borrowers may end up owing more than their home’s value, which may encourage some to default.
But a small deposit was interesting for Abraham and Crystal Cardona. They both have high credit scores, close to 800, but in September they took an FHA loan from a non-bank lender when they bought a $ 500,000 home in La Mirada.
The minimum down payment of $ 17,000 saved them enough to buy a few appliances and put up a fence around their back pool.
“We were thinking what our monthly payment would be, not where the loan came from,” said Abraham Cardona, 32.
In 2005, non-bank lenders, many subprime loans, accounted for 31% of all home loans, according to a report by Goldman Sachs.
Many of these companies have gone bankrupt. In 2009, only 10% of home loans came from non-bank organizations.
But last year, nonbanks accounted for 42% of all mortgages.
At a conference in September, John Shrewsberry, chief financial officer of Wells Fargo, said the bank was not interested in lending to riskier borrowers, even those who meet FHA standards.
“These are the loans that are going to default, and these are the defaults that we are going to assert in about 10 years,” he said. “We’re not going to start over. “
Bank withdrawal is a problem for Ginnie Mae, who guarantees FHA and VA loans bundled into bonds and sold to investors. It is much easier to ensure banks have reserves to cover defaults than it is to harvest new lenders, with a variety of business models.
“Where will the money come from?” asked Tozer. “We want to make sure everyone will be there during the next downturn. “
Consider Moorpark-based PennyMac, now the country’s sixth-largest mortgage lender, according to trade publication Inside Mortgage Finance. It has a corporate structure that might be difficult for regulators to grasp. The business is made up of two separate but related publicly traded companies, one that creates and manages mortgages, the other a real estate investment trust that purchases mortgages.
PennyMac is managed by Stanford Kurland. He was number two for Angelo Mozilo, the founder of Countrywide who came to symbolize the excesses of the subprime mortgage boom. Kurland maintains that PennyMac is not too complicated and takes care to distance itself from subprime excess. He was fired from Countrywide in late 2006, before his worst loan was granted, due to disagreements with other executives, he said.
Two years later, he and other former Countrywide executives founded PennyMac, which completed $ 36.9 billion in mortgages in the first nine months of this year.
Kurland has said he agrees that Ginnie Mae needs more resources to monitor non-bank lenders, but he bristles at the idea that they are making riskier loans.
“The fact that someone is a non-bank organization does not give them the possibility of granting a loan outside the standards,” he said.
Kurland noted that PennyMac’s FHA borrowers have an average credit score of 692, above the FHA average of 679.
At Stearns Lending in Santa Ana, the default rate on loans issued over the past two years was 0.8%, slightly lower than the average bank rate.
“As you start browsing banks and non-bank institutions, you will find people who are massively underperforming and massively outperforming,” said Brian Hale, managing director of Stearns and former president of the Countrywide division. “It comes down to execution.”
Delinquency rates vary, according to data from the Department of Housing and Urban Development.
FHA loans from Anaheim’s Carrington Mortgage Services non-bank lender, for example, have a default rate of around 2.9%, while loans from Detroit-based non-bank giant QuickenLoans have a default rate of just 0. 4%.
Among banks, Wells Fargo’s rate is only 0.5%, while at Great Plains Bank in Elk City, Oklahoma, it is 2%.
For now, regulators are not worried.
Sandra Thompson, deputy director of the Federal Housing Finance Agency, which oversees government-sponsored mortgage buyers Fannie Mae and Freddie Mac, said non-bank lenders play an important role.
“We want to make sure that there is ample liquidity in the mortgage market,” she said. “It gives borrowers options. “
For now, these options seem relatively safe.
The rules of the Dodd-Frank Wall Street Reform Act of 2010, enforced by the new Consumer Financial Protection Bureau, require all lenders to examine borrowers’ income, assets and debts to verify that they can afford the repayment – whatever. something subprime lenders never had to do.
The related rules also provide lenders with some legal protection when they take out loans to meet the federal standard for a “qualifying mortgage”.
However, there is market share to be gained by issuing loans outside of these standards.
Impac Mortgage from Irvine, a publicly traded non-bank lender, almost went bankrupt during the housing crisis because it specialized in Alt-A mortgages, loans made without proof of income or assets. Now it is back in the lending business, primarily the origin of standard government guaranteed loans.
But about a year ago, he started offering “AltQM” loans, as: an alternative to qualified mortgages. These higher rate mortgages may have interest-only payment periods, adjustable rates, or exceed debt guidelines.
The company declined to comment, but noted in the documents that it targets borrowers who need more flexibility, which could mean high net worth clients with other large loans.
For now, bond investors are playing the card of caution, preferring low-yielding bonds backed by qualified mortgages, especially after so many plunged into riskier mortgage bonds a decade ago.
But some expect investors to eventually acquire an appetite for higher yield bonds backed by riskier mortgages, which would encourage more lenders to issue them.
“Everyone says they’ve learned their lesson,” said Guy Cecala, editor of Inside Mortgage Finance. “But we know everyone has short memories.”