Managing mortgage madness

<i>Brokers, industry insiders dish about new lending standards and getting financing in today's tough climate</i>

Richard Bouchner, managing director of the Commodore Property Group.
Everyone in the real estate industry knows that the price of admission for a mortgage has gone up. And just about everyone agrees there’s good reason for that, given that loose lending standards were largely responsible for the financial mess that plunged the economy into a recession and sent real estate into a tailspin.

With the days of quick and easy jumbo loans and 100 percent financing now merely a memory, mortgage brokers have had to completely alter the way they do business.

This month, The Real Deal talked to mortgage brokers and other mortgage industry professionals to find out how the industry is doing in New York City.

While nearly everyone said business is up compared to a year ago, when they were dealing with the immediate aftermath of the Lehman debacle, new Federal guidelines designed to protect borrowers and inject more transparency into the system have slowed down the process of securing a mortgage.

And the relationship between banks and mortgage brokers is strained, with fewer banks offering fewer products. As one mortgage broker said: “It’s all cookie-cutter stuff; not every borrower fits into a box neatly.”

But while credit scores still need to be high, brokers say there are other ways for buyers who don’t fit into the box to get a mortgage. And if buyers qualify for FHA financing, they can get a conforming loan with as little as 5 percent down.

Meanwhile, mortgage activity was driven by refinancings last year, but many say that well will soon run dry, especially if mortgage rates go up.

For more on which buyers and buildings are fueling mortgage activity in New York, what kinds of mortgages are being financed and the new standards mortgage brokers are dealing with, we turn to our panel of experts.

Richard Bouchner
managing director, Commodore Property Group

We know that the mortgage industry is changing day-to-day, but what are the latest trends you’re seeing in New York City?
We are seeing very few folks coming to the table with deals above $729,750 [the current loan limit for Fannie Mae and Freddie Mac]. As a broker we don’t have resources that are funding above that loan. In the past, to keep clients happy, I have referred out larger loans to private banking contacts I have. There are no guarantees with these sources, but if they like the client the private banks are more apt to lend out of their own portfolios. Another trend we’re seeing is where folks are coming to us, particularly first-time buyers, to buy condos with an FHA loan. There are more developments that have been pre-screened and it is possible, although difficult, to do spot approvals for an FHA deal.

What is the most concerning trend you’re seeing in the New York mortgage industry right now?
There are fewer places to go for mortgages and all the banks out there are offering the same products. It’s all cookie-cutter stuff; not every borrower fits into the box neatly. For self-employed people or folks with a lot of assets but credit that is a little dinged up, it’s very difficult to get a mortgage.

What sort of credit scores are banks demanding now, and how does it compare to a year ago?
A year ago to 18 months, 680 was the price of admission, and sometimes lower if you had good income and good assets. Then it went up to 700, and now in many cases it is up to 720. That doesn’t mean you can’t get deals done below 720, but 720 is the new platinum score. I have a deal in Tribeca for a $729,000 [apartment] and the gentleman has a 690 score. That’s fine; it is not going to affect him. He’s got plenty of equity and everything else is good. But if you are on the fence with some other issues, that score might become an issue.

What sort of documentation are banks demanding now?
All deals are now full doc, which means you have got to have two pay stubs, or two years of W-2s or 1099 forms for those who are self-employed. And borrowers need to sign the IRS form 4506, which gives permission to banks to pull tax returns. It used to be that banks would only pull a tax return if the borrower defaulted on the loan within the first 30 or 60 days. Now my understanding is that banks are pulling tax returns while the loan is in underwriting because there has been so much fraud. There is nothing wrong with that; it just slows the process down.

We reported recently that some buyers are shifting away from mortgage brokers to banks. How is that impacting your business?
I only have one situation that I know of where we’ve been impacted. It was a woman who came to me as a referral through a real estate broker. I thought we had developed a good rapport. She decided to go directly to the bank even though our rates were comparable. She wasn’t able to get her mind around the yield spread premium (see “Mortgage pros brace for hit to pocketbook”) that brokers are required to disclose in good-faith estimates. That’s the way it works regardless, whether it’s a bank or a broker. We all make money with the spread between how much it costs to borrow the money for the institution and how much the borrower is willing to pay. I explained this to my client and she felt like somehow this was going to come out of her pocket. She went directly to a lender and got the same rate, but banks are not required by law to show yield spread.

How is your business doing compared to three months ago, six months ago and a year ago?
We’re actually holding our own. In our heyday as a mortgage business we probably had 15 loan officers, back in pre-Lehman days. We are now down to myself, my partner and probably three or four guys who are doing deals with us. But that’s okay, because our overhead has shrunk along with our revenue. Our margins are still pretty good. It’s a very challenging environment to be a mortgage broker because there are fewer conduits for us to do business with and the banks that are still around are continually tightening the rules.

Jeffrey Appel

Jeffrey Appel
vice president, Bank of America

What is the most concerning trend you’re seeing in the New York mortgage industry right now?
The lack of clarity with the robust regulatory changes, the Home Valuation Code of Conduct, the Mortgage Disclosure Improvement Act and most recently Regulation X, which went into effect at the beginning of this year. All of these measures are designed to make the process more transparent. In the spirit of that, it’s terrific … but getting everyone on the bus and getting these new regulations implemented is always a challenge and there is a lot of misinformation out there.

What sort of credit scores are banks demanding now, and how does it compare to a year ago, six months ago or three months ago?
When we talk about conforming loans up to $729,750 you can still get a mortgage with a credit score as low as 620 points presuming all the other factors qualify you. There has been a tightening when it comes to credit scores, particularly on the jumbo side of the market where it’s difficult to get a jumbo mortgage with a score less than 680. We are back to a time where banks want to understand very clearly the profile of the person who is borrowing money. Do they make exceptions for deals that make sense? Absolutely. Do they take into consideration more than just the credit score if the borrower can demonstrate why it makes sense to? Absolutely. Credit scores are tighter but I don’t think that it’s as difficult as what is anecdotally reported.

What sort of down payments are banks demanding now, and how does that compare to a year ago?
If a buyer qualifies for FHA financing, they can still buy a property up to the conforming loan limit with as little as 5 percent down. There is 95 percent financing out there for loans up to $729,750 on a one-family house. On a two-, three- or four-family house that number is significantly higher. … On the jumbo side you can get 80 percent [financing] to $1 million, 75 percent to $1.5 million, 70 percent to $2 million and, depending on the circumstances, as much as 70 percent to $3 million. It is not the same crazy leverage that we saw at the tail end of the securitized mortgage boom, where you could get 95 percent to $2 million without income documentation. Again, it’s a return to quality.

We reported recently that some buyers are shifting away from mortgage brokers to banks. How is that impacting your business?
It’s great for my business, and I think that’s absolutely true. It’s very difficult to act as a broker in this environment. HVCC alone has made it difficult because a broker can no longer move that property’s appraisal from bank to bank. By the time an appraisal gets ordered, which these days has to be done early in the contract process. … The broker has already locked down the bank that’s going to provide the financing. Then you lose the big benefit of what going to a broker was all about — to continue to shop that financing package right up to almost the very end. … That value proposition is impossible to deliver today, so it’s the reason why my group relocated to a bank.

What are the differences you’re seeing in New York right now on conforming loans versus nonconforming or jumbo loans?
I’m happy to say that jumbo loans are in our wheelhouse. We like jumbo loans here. We have fixed-rate products that [offer] 70 percent [financing] on co-ops and condos to $3 million. There is no shortage of jumbo financing out there in New York City. Jumbo mortgages are absolutely available, but they are not available for people who can’t demonstrate the income, assets or credit history to make them an appropriate credit risk.

Sign Up for the undefined Newsletter

Guy Cela

Guy Cecala
publisher, Inside Mortgage Finance Publications

What are the latest trends you’re seeing in the New York City mortgage industry?
The negative trends are rising interest rates; 2009 was the year of 5 percent or below for 30-year fixed-rate mortgages, the lowest we have seen in our lifetime. The expectations are that we are not necessarily going to see that again in 2010. We will probably start out closer to 5.25 percent or bounce up to 6 percent.

What sort of changes are you seeing regarding mortgage insurance?
One thing that we’ll probably see resurrected is private mortgage insurance on any mortgage that has less than a 20 percent down payment. There has been a shortage of private mortgage insurance because those companies, like all insurance companies, have been taking big losses, so they have imposed even tougher underwriting. That should improve in 2010. You’ll have to pay for it, but at least it will be available.

We reported recently that some buyers are shifting away from mortgage brokers to banks. How is that impacting the business?
There has been a general shift, which started in 2008 and accelerated in 2009, where major lenders are reluctant to deal with mortgage brokers. Mortgage brokers are blamed for a lot of the lax underwriting in the problem loans that originated over the last two or three years. Lenders are restricting the types of mortgages they are willing to make through mortgage brokers. That doesn’t mean if you are a consumer that you can’t talk to a mortgage broker, but more than ever you can’t assume that a mortgage broker can get the best rate and terms. That is going to continue in 2010, with less mortgage brokers out there doing less business. The numbers already support that.

How is the mortgage industry doing compared to three months ago, six months ago and a year ago?
Industry-wide, much of the mortgage activity in 2009 was fueled by refinancings, which accounted for close to three-fourths of all mortgage activity. There are a couple of problems with that. One is, you pretty much lose that refinancing as soon as rates start to go up. Also there is an exhaustion of the refinance pool of borrowers out there. When rates stay at 4.75 percent for a 12-month period, anyone who can benefit from refinancing and qualifies does so. In the fourth quarter we started to see refinancing activity fall off significantly, and that is likely to continue in 2010. The mortgage industry is going to be much more dependent on home purchase activity, and that’s a reason for concern because of declining volume. But it’s also a reason for optimism among homebuyers or consumers because if lenders are really intent on increasing that business, they will have to do something to encourage more business — lower rates, better terms, something.

What are your predictions for interest rates this year?
In terms of rates, I’m probably more optimistic than most people. I think rates may rise from 5 percent to 5.5 percent. I don’t think the Federal Reserve will let them go to 6 percent because the housing recovery we’re seeing is so precarious.

Eric Appelbaum

Eric Appelbaum
president, Apple Mortgage Corp.

What are the latest trends you’re seeing in the New York City mortgage industry?
We are seeing three trends in the mortgage industry. First is the Fed is requiring all mortgage brokers to receive 20 hours of education on national laws and a few hours for each state. The Fed is also requiring brokers to pass a test to prove their mastery of the material. So far, the classes and preliminary exams have been very easy. I think this will bode poorly for the retail banks because loan officers from retail banks are not kept to the same standard. Just wait: you will see a large bank sued for loan officer infractions and for their failure to adhere to national standards. This will push the large retail banks to add layers of management and processes to protect against any digression from the Fed’s new rules. Second, the Fed is requiring the use of a new “good-faith estimate” for mortgage brokers and lenders. The disclosure was drafted to make it easier for the borrower to shop for a mortgage and to insure that the fees quoted are identical or very close to the fees incurred at the closing. That, along with the new appraisal rules, has slowed down the mortgage approval process by at least seven calendar days. Third, savings banks are taking the lion’s share of the business in New York City. They are taking most of the business away from the four behemoths — Chase, Bank of America, Citi and Wells.

What is the most positive trend you’re seeing right now in the New York City mortgage industry?
The market looks very similar to the market in 1993, when I started in the business. Then the agencies (FNMA and Freddie) didn’t have a majority of the business. The savings banks controlled the market.

What sort of down payments, loan-to-value ratios for different types of loans, income and other documentation are banks demanding now?
Agencies will lend up to 80 percent with a loan of $729,750. We have some savings banks that will lend 80 percent to $2 million, but that’s only if the application meets all guidelines. This is rare. Most lenders will lend 70 to 75 percent for a $1.5 million [home] and 65 to 70 percent for a $2 million [home].

How is your business doing compared to a year ago? How much is it up or down by?
This period compared to one year ago, business is up about 10 to 15 percent.

What are some of the unique strategies you’ve heard about among developers?
The most unique strategy that is working is where the sponsor is willing to hold back paper. Here a savings bank will lend the buyer 70 to 75 percent of the purchase price and the sponsor will lend an additional 10 to 20 percent so the buyer doesn’t have to put down 20 percent. The problem is, the sponsor usually needs approval from their lender.

Rose Schwartz
senior loan officer, Everest Equity Company

What is the most concerning trend you’re seeing in the New York City mortgage industry right now?
Conforming lenders require a 70 percent presale for condos, which makes new construction financing very difficult.

How is your business doing compared to three months ago, six months ago and a year ago?
Business is definitely up over a year ago.

What are your predictions for interest rates this year?
Interest rates are definitely on the rise.

Julie Teitel

Julie Teitel
senior vice president, GuardHill Financial

What are the latest trends you’re seeing in the New York City mortgage market?
I have received a lot of new purchase leads and deals so far in 2010. Currently that business is better than refinance business for the mortgage industry because the purchase deals tend to have a higher close ratio.

How is your business doing compared to three months ago, six months ago and a year ago?
January to May of 2009 was really hard. I was extremely busy but spinning my wheels because nothing was qualifying. I felt like I was in college going through growing pains, [but] that paid off because between May and December of 2009 things doubled, and it became easier to get the loans closed. I’m feeling positive in 2010. If you were able to get through the mortgage hazing period of 2008 to 2009, then 2010 should be back to normal — although not too easy that we cause another crisis.

Who are your typical customers these days? What are they looking to buy?
Mostly resales. The average client is a first-time homebuyer. I also have a lot of foreign national mortgages and a lot of jumbos. I like jumbo loans better because the banks’ guidelines make more sense — they don’t have to follow the Fannie Mae guidelines.