The battle of the banks

Last year, Luxury Mortgage Corporation’s Mira Dick worked with a former Wall Street banker who was having trouble locking in a mortgage for a $2.2 million Manhattan condo.

The buyer, who was in his 20s, had quit his job to launch his own fund. Without a salary and bonus package, traditional banks shied away from issuing him a loan.

But Dick’s Stamford, Connecticut-based firm financed 80 percent of the Upper West Side apartment purchase. “We had to loosen our lending; otherwise he never would’ve gotten it,” she said.

That deal speaks volumes about the current lending environment in New York, where traditional banks are under increased pressure from their nontraditional counterparts.

While banks remain dominant in New York’s residential lending space, they’re being pushed to add more sweeteners — to the extent they are allowed under federal guidelines — in order to stay competitive with rivals that are eating further into their market share.

“Nontraditional lenders have definitely taken some share,” said Ace Watanasuparp, vice president of residential lending at Citizens Bank, which works with Douglas Elliman as a preferred lender.

The numbers back that up. In 2016, 30 percent of residential loans in New York were issued by nonbank lenders, up from 22 percent in 2012, according to the Manhattan-based Association for Neighborhood & Housing Development, an affordable housing group. While that was the most recent stat on record, sources say the number has likely increased in the last three years.

Further tightening the screws on banks is that mortgage originations both nationally and in New York are down overall.

In the New York metropolitan area, loan originations slid 10 percent year over year in 2018’s third quarter to 76,380, according to ATTOM Data Solutions.

One bank executive, who asked to remain anonymous, said the big national banks “are being extra cautious this late in the cycle.”

Even in Manhattan’s luxury market, “the majors are very sober,” the executive added.

This month, to get a sense of whether the residential lending is, in fact, sober, The Real Deal pored through public property records to determine how much these players lent in 2018 on properties priced at $2 million and above — and who lent the most.

Leading the pack was JPMorgan Chase with $967.1 million issued in the five boroughs for the year. It was followed by Wells Fargo, which clocked in with $812.2 million; First Republic (with $670.5 million); Bank of America (with $623 million) and Citibank (with $260.7 million).

In total, the top five lenders provided $3.33 billion in residential mortgages in New York City in 2018, according to TRD’s analysis. That was 143 percent above the $1.37 billion the top five firms originated in 2008, according to TRD’s numbers.

While compared to 2008, banks are lending more, they’ve recently taken a hit on the residential lending front.

In an attempt to combat that, sources say, many are getting as aggressive as legally allowed. Bank of America, Citibank, Wells Fargo and Chase all have products with down payments as low as 3 percent — versus the typical 20 percent.

And everyone is ramping up efforts to go after the most coveted demographic group out there: millennials. A recent study by the National Association of Realtors found that millennials were the most active group of homebuyers in 2018, making up about 36 percent of purchasers. Watanasuparp said that will likely jump to about 65 percent of buyers by 2020 or 2021.

With that demographic shift on everyone’s radar, sources say banks need to invest in technology that appeals to millennials and find ways to ensure that their market share doesn’t further slip.

“We have to make sure we’re not only keeping up with the landscape but also reacting,” said Hilani Kerr, a retail sales executive at Bank of America.

More flexible debt

Alan Rosenbaum, CEO of the Manhattan-based mortgage lender and brokerage GuardHill Financial, said “buyers need lenders that will do the nonvanilla deal.”

“Big banks aren’t going away, but they’re not surging forward right now,” said Rosenbaum.

He said these “nonvanilla” deals involve looser guidelines and more flexible terms for borrowers.

Rosenbaum pointed to one New York client who — like Dick’s buyer — started a business after leaving a large investment firm. While many larger traditional banks avoided the deal because the borrower didn’t have a two-year history of employment, GuardHill issued the loan.

While banks generally still want to see credit scores over 620, some nontraditional lenders will sometimes accept scores below that and will lend based on assets rather than income.

Citizens’ Watanasuparp said that wealthy buyers are taking advantage of financing because the stock market “is so volatile.”

He and others noted that buyers in the $5-million-to $8-million range rarely used to consider financing, but with stock fluctuations and interest rates in the 3-to-4 percent range, that’s changed.

Watanasuparp said that for lenders  one key is impressing on borrowers that they should not just be  factoring in prices. Instead, they should be making a “holistic” calculation about affordability.   

“If rates go up by 1 percent, it means that the buyer will have an 11 to 12 percent less buying power,” he said. “So if the buyer is waiting and they’re on the fence, it’s our job to show them our pro forma [outlining that].”

The seems particularly relevant in the New York market, where inventory is piling up and buyers are taking their time.

Ari Harkov, an agent at Halstead, said clients have often already shopped around for rates by the time they’re ready to pull the trigger on a deal. “Buyers seem to much more focused on dollars and cents than ever before, across all price points,” he said.

Luxury Mortgage’s Dick said that in the last year, her firm has seen a surge in New York of non-QM lending — otherwise known as nonqualifying mortgages, loans that do not follow the guidelines put into place under the Dodd-Frank Act of 2010.

“The pendulum is swinging back to try to help those people who should not be punished for not having a perfect credit score,” Dick said. “If they had an isolated credit event, we understand that.”

The millennial market

If there were any doubts about how coveted millennials are, look no further than how lenders are shaking up their marketing strategies.

Last year, Chase Home Lending partnered with Pinterest and the bank’s celebrity spokespeople, the Property Brothers, the home renovation reality TV duo. The initiative allowed users to create customized Pinterest boards for dream home renovations by filling out a quiz.

Similarly, Goldman Sachs inked a deal with JoJo Fletcher, a former star of ABC’s “Bachelorette” franchise. Fletcher — who worked as a real estate developer prior to her reality TV days — was enlisted as a spokesperson for Marcus, the firm’s consumer-lending arm.

Citizens’ Watanasuparp said on a panel in January that the narrative often pushed about millennials not being interested in buying property is “just not true.”

He also dismissed the notion that the demographic doesn’t have money. He said that while they might not have enough for a down payment in New York, “their wage earned income is actually really high.”

And he said that for those in New York startup world who have stock options — or other forms of nontraditional income — “a lot of banks now [are] creating different ways to really figure out how do we blend the ratios together.”

Citizens, he said, allows qualifying buyers to finance up to 90 percent of a sale up to $2 million. In New York, where prices are high, that can make a difference because younger clients with high salaries may still not have enough savings for a down payment.

Bank of America’s Kerr said her institution is also cognizant of other factors that millennials consider when choosing a lender.

To that end, the bank is not only looking to offer more affordable loan options, but also to highlight its efforts on environmental and social issues. “How they select companies is different from how the boomers would do it,” she said.

Banks also have one key advantage over nonbank lenders. They have other lines of business that they can dangle in front of buyers — and they can tap buyers as clients for other services.

Sources say banks are chasing consumers they think can be converted into clients for  services such as wealth management. Banks are also generally more willing to offer better deals and incentives to customers who have accounts at the institution or use other services there.

For millennials, that might mean credit card points or student loan refinancing.

Watanasuparp said Citizens is hoping its student loan refinance program, which offers lower rates to pay off debt, will help more buyers and bring in more business.

Seizing on this new millennial reality, big banks have also been investing in the digital mortgage process.

Both Wells Fargo and Bank of America rolled out digital mortgage applications last year, and Chase has a mobile banking platform dubbed Finn.

Speaking to that trend, the Detroit-based lender Quicken Loans — the country’s largest online mortgage provider — was among the top loan originators nationally, along with Wells Fargo, United Wholesale Mortgage and Bank of America, according to ATTOM. (Quicken Loans, which has made inroads in New York in the last few years, claims to have closed nearly half a trillion dollars of mortgage volume from 2013 through 2018.)

And big banks and nontraditional players aren’t the only ones competing for a slice of the New York residential pie. Local and regional banks are also in the mix.

Anthony Simeone, executive vice president and chief lending officer at Ridgewood Savings Bank, acknowledged the increased competition from nontraditional players but said the company’s originations have been fairly consistent over the last several years.

In addition, Ridgewood, a privately held bank, doesn’t have to worry about shareholders and stock price moves, he said. Simeone said Ridgewood hasn’t loosened underwriting standards across the board but has offered more flexible loans with down payments as low as 3 percent or 5 percent.

“We have not pulled back,” he said. “We don’t necessarily have the same objectives as a larger bank.”

Not time for ‘amnesia’

Sources insist that while banks may be loosening standards, they aren’t falling into the same traps they did in the lead-up to 2008’s global financial meltdown.

Precrisis loans included risky adjustable-rate mortgages with no money down — and lenders also offered short-term “teaser” rates that were only valid for the first few years of the loan.

Big banks are no longer offering those kinds of terms — and their profits show it.

Wells Fargo’s net income for its mortgage banking segment was $467 million in 2018’s fourth quarter — down nearly 50 percent from a year earlier. And at JPMorgan Chase, home lending revenue fell 8 percent to $1.3 billion, driven by lower volumes and a “highly competitive environment,” the company said.

In addition, while lenders and brokers are often focused on the higher end of the market, some said that loosening standards also means more access to financing for the nonwealthy.

Caroline Nagy, deputy director for policy and research at the Center for NYC Neighborhoods — which promotes affordable homeownership in the five boroughs — said making loans more accessible to borrowers is a good thing because it helps lower-income and first-time homebuyers.

“The trends are pretty unfavorable for people who are not wealthy enough to get a mortgage and buy a home in New York City,” she said.

But Nagy said lending needs to be done responsibly and include education and counseling for borrowers who are new to the mortgage world.

“Just because it’s been a decade doesn’t mean that it’s time for amnesia and the ‘anything goes’ lending days,” she said. “That’s the tough balance.”

Gerard Cassidy, an analyst at RBC Capital Markets, said today’s underwriting standards are stronger and that loosening them a bit is a natural progression after credit became very constrained postcrisis.

“The banking industry has very long memories,” he said. “They are not willing to take the risk. Lower credit risk means less potential of being raked over the coals.”

He added: “The nonbank mortgage lenders are obviously here to stay.”