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Friday, Mar 29, 2024

Subprime Comeback

Ten years after a national financial caused in part by subprime mortgages, these types of real estate loans are making a big comeback. Financial professionals may not agree on the reasons behind the uptick in what are now called “nonprime loans” or “non-qualified mortgages.” But it’s beyond dispute that that they differ from past mortgages in a few ways due to the Dodd–Frank Wall Street Reform and Consumer Protection Act. Alim Kassan, co-chief executive at Athas Capital Group Inc., a Calabasas nonprime lender, said the regulations, passed by Congress in the aftermath of the recession, require that borrowers verify they can repay and that loans backed by a person’s primary dwelling can no longer have a balloon payment. “These two regulatory issues, combined with more common-sense lending, if you will, make me feel comfortable about the originations we have today,” Kassam said. Higher interest rates Nonprime borrowers are defined as people who cannot qualify for a traditional mortgage from a commercial bank for several reasons, including a poor credit history, being self-employed or unemployed, medical issues or needing the money in a hurry. Fix-and-flip loans also come under the banner of nonprime loans. These are borrowers purchasing a non-stable asset in need of a short-term bridge loan to do rehab work to stabilize the property and then either to sell the property for a profit or get a conventional loan if the property is held as a rental. While Kassan said that Athas Capital does not do a lot of business with house flippers, Anchor Loans in Calabasas does. Anchor Chief Executive Steve Pollack said a few banks handle fix-and-flip loans and that Anchor’s clients would qualify for them. The bank loans would have a lower interest rate, but the banks do not understand the rehab industry because it is not a major part of their balance sheet, Pollack said. “In general, it does not make sense for the type of business model that our borrowers have,” he added. Anchor’s interest rates range from 7.5 percent to 13 percent. Its average loan in California is about $450,000 while in the 44 other states in which it lends the average loan is about $175,000. By comparison, Athas has an interest rate range of 6 percent to 10 percent, and an average loan amount of $450,000 in California and other western states in which it has clients, which are brokers. A 30-year fixed mortgage of $300,000 in the Los Angeles area carries an interest rate of 4.2 percent to 4.7 percent, according to Bankrate, a financial comparison website. Michelle Rodriguez, chief compliance officer and in-house counsel for Woodland Hills Mortgage Corp. in Woodland Hills, said that the firm works primarily with borrowers who have to go with nonprime mortgages because of the tightened regulations from Dodd-Frank. The firm has a reputation of custom tailoring a loan to the needs of the borrower while still being compliant with the federal law. “We do not have institutional investors telling us what to do,” Rodriguez said. The lender has interest rates that start as low as 6.95 percent and go up from there. The average loan amount is in the low $200,000s, Rodriguez said. Recovering market A December report from S&P Global Ratings gives a glimpse of the potential of the nonprime market. The report states that given improved underwriting standards that off-set risk factors and interest spreads, non-qualified mortgage lending should give rise to a healthy new market for borrowers on the sidelines unable to qualify for a conventional loan. “The market will continue to evolve, and as it becomes more liquid, securitization execution will become more efficient and spreads should tighten,” the report said. Fitch Ratings, the credit rating and research division of financial information services Fitch Group in New York, said in a January 2017 report that the nonprime market in residential mortgage-backed securities was gaining momentum. In 2015, there were 10 nonprime securities transactions from five issuers totaling $1 billion. Fitch estimated those figures could double in 2017 with rapid growth expected over the next several years. “The growth will be driven by a handful of early market entrants gaining traction with brokers and correspondents, higher interest rates that will redirect lender focus from prime refinances to non-prime, and successful securitizations that provide visibility and incentives for potential issuers,” the Fitch report stated. A residential mortgage-backed security is made up of a pool of mortgage loans created by a bank or other financial institution. These securities, which included billions in subprime mortgages, were at the center of the financial crisis in 2008 that led to the recession. In 2005, nonprime residential mortgages were approximately a $625 billion to $650 billion market. That has shrunk to be a $20 billion industry these days, said Kassan of Athas. And as far as he can tell, it will not return to those pre-recession levels again. “But I think it can easily get back to a fourth of that size, somewhere around a $150 billion a year,” Kassam said. From his perspective, what has changed is that brokers who had previously not been motivated to work with nonprime borrowers now see them as a replacement for the declining new mortgage and refi markets. Rodriguez agreed. She said that brokers who must put food on the table are willing to go after nonprime borrowers they had shunned before. “If there are no conventional borrowers out there, because they are all waiting for the interest rates to go down or they have already (refinanced), they are working on the harder deals,” she added. But still, Rodriguez said that while she wasn’t convinced the nonprime market was growing, that didn’t mean business at Woodland Hills Mortgage was slacking off. “Our business isn’t letting up,” she said. National footprints In the fix-and-flip sector that Anchor’s Pollack serves, there has never been a dominant player. The market has been fragmented by many small lending firms and only in the last couple of years have lenders gone after a national footprint, Pollack said. Even as the largest lender in the rehab space, Anchor only has about 2 percent to 3 percent of the marketplace. Pollack attributed its growth to branding and marketing combined with a presence across the U.S. “People are now coming to know who we are and thereby we are able to grow in markets where we had not had a presence before,” he added. In March, the company reached $139 million in loan originations, which Pollack called a record. Anchor does a fair amount of lending in the rehab sector in the Valley as well as financing some ground-up construction in Reseda and Encino south of Venture Boulevard. “We do not do much ground-up construction outside of California,” Pollack said. “It requires more oversight. We like to keep it local so that we can keep our eyeballs on it.” Like Anchor, Athas makes loans throughout the U.S. although a majority of those are in California, including the Valley. Most of Athas’ competitors pick a subsector of the nonprime market. Whether it’s consumer or business nonprime, hard money or short-term bridge loans, lending secured by commercial collateral or fix-and-flip loans. Kassan said that Athas is the only true one-stop shop where if a borrower does not fit into a conventional box, a loan can be found for them. “We have the most diverse product offering in our subsector,” Kassan said.

Mark Madler
Mark Madler
Mark R. Madler covers aviation & aerospace, manufacturing, technology, automotive & transportation, media & entertainment and the Antelope Valley. He joined the company in February 2006. Madler previously worked as a reporter for the Burbank Leader. Before that, he was a reporter for the City News Bureau of Chicago and several daily newspapers in the suburban Chicago area. He has a bachelor’s of science degree in journalism from the University of Illinois, Urbana-Champaign.

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