EP 274 – Nonprime Mortgage Lending’s Impact On Real Estate And Note Markets

NCS 274 | Nonprime Mortgage Lending

NCS 274 | Nonprime Mortgage Lending

Let’s face it: no matter how it’s phrased, nonprime is still subprime. With the recent appearance of nonprime mortgage lending, it is important to examine what it means to the real estate market and note markets. The subprime mortgage lending industry suddenly vanished after the Great Recession, but is now getting reinvented – get this, with a really original new name for it: nonprime. Right now, a couple of big firms are offering mortgages with less than perfect credit. How can we, as business owners, make sure that we get the bigger part of the bargain this time and not those guys in Wall Street? Take a listen, and don’t let history repeat itself.

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Nonprime Mortgage Lending’s Impact On Real Estate And Note Markets

I got some good stuff to discuss on the show. We don’t have a guest. We will hopefully have a couple of guests based off this show. First and foremost, I want to give a couple of announcements, especially for the audience. I want to give you a bit of a heads up on a couple events that are upcoming. If you’ve heard us talk about any of the Money Mondays with Quest IRA, they have their big Quest Expo taking place on August 25th and 26th in Dallas, Texas that we’re going to be a part of and I’m honored to be speaking out and being a vendor in that. For our Mastermind members, for our people that are thinking about joining the Mastermind, we’re going to do our next Mastermind in August, two days prior to the Quest Expo on the 23rd and 24th. Quest is excited and we’re excited and we’re putting that stuff up together. We have our own separate room block of rooms to fill there at The Westin. We got a phenomenal rate on it. I’m excited about the room block rate. We’re going to have two days beforehand. Our Mastermind members are coming on Wednesday. We’ll spend Thursday and Friday together at the hotel then on Saturday and Sunday will be for the Quest Expo.

There will be a cost for that for the Mastermind members, but we’ve got it reduced at discount price for our Mastermind members as well. Also, we’ve got a discount code for our WCN family, Note Closers family as well, so keep an eye out for that and reach out to us. Let’s just say Quest gets 500 investors or 500 in attendance at their event as it’s still a phenomenal event in Dallas, we’re going to do our best part to help drive that. Let’s see if we can get to a thousand and we’ve got some really cool things lined up for our members, for our Note Closers, for our audience. We’ll have a booth there, swing by the booth. We’ll give you some goodies for our Note Closers family out there. I wanted to start that off with the guys let you know about the Quest Expo. That’s an important thing and our next Mastermind.

I see we’ve got quite a few people that are interested in learning a bit more. We’re going to talk about the main topic of this episode is the fact that we’ve talked about how banks are loosening up their guidelines. They’re doing a 100% financing and 0% down, which is scary. We’ve already seen that over the last few months. There was this article that popped up and I have to thank Shannon Flynn from New 2 U Properties who posted what I saw. It’s a pretty interesting article. It talks about how sub-prime mortgages could come back with a new name and sorting them in. The subprime mortgage industry vanished after they call it the great recession, but it’s now being reinvented. It comes with a really original new name for it, non-prime. Not subprime, non-prime. Those guys in Wall Street are phenomenal when it comes to marketing. There’s two big firms right now. One of them being Carrington Mortgage, which is doing loans in roughly about 35 different states. They’re offering mortgage they say is, “Less than perfect credit.” It’s no surprise that demand from above borrowers and investors has exceeding expectations when it comes to it.

This article a came on CNBC. It talks about the fact that they have plans to securitize these investors because they’re looking for higher returns. We believe that there’s a secondary market for people who want to buy non-prime loans that have been properly underwritten. The Executive VP for Carrington Mortgage says, “We’re not going back to the bad old days of ninja lending, no income, no job, when people have no jobs, no income, no assets are getting loans.” I get that and understand that. It talks about that each of these loans are manually underwritten and assessing the individual risks, but it will allow for borrowers to have full credit scores as low as 500.

The current bank average is somewhere in the 700s. Borrowers can take out loans of up to $1.5 million on single family homes. They got a town’s economy. They also do cash out refinances where they can tap the equity homes up to half a million in cash out. Credit events, not credit blemishes, but credit events like a foreclosure, bankruptcy, or history of late payments are acceptable. This is what’s crazy.

I reached out to Angel Oak. There’s another one called Caliber Home Loans. They’re also doing some none non-prime stuff. I’ve reached out to see if we can get somebody on checking out the marketing in Florida to be a guest on the show and we’re working on that. These banks that we’re talking about, this article goes and talks about having to go ahead to reevaluate how they underwrote the written the loans. Fannie Mae is providing very lowdown payment loans and has been for a while, but these are coming into it. They’re dropping them down to 500 and often these other things that was scary. Let’s see this like saying the family raises debt to income limit from 45% to 50%, so you’re willing to give somebody a loan with a little bit more strapped. That opened up too, that the amount of a higher debt income loans increased from their 6% in January, 2017 to nearly 20% of the loans have people that are a little bit more strapped.

What I want to get at is it’s not a good thing. They’re making loans to people who either had credit events, they’re not paying their existing mortgages or credit or the bills, and they got hired to think mortgages. You can manually underwrite all these loans, which back in the day in 2008, so many of the subprime loans were already manually underwritten anyway. Being an ex-mortgage banker, we used to do a lot of sub-prime loans. I used to do a lot of investor loans back in the day and yes, many were underwritten. If you don’t have to provide W2s, you can provide just bank statements, which is the funny thing I want to get to as well.

NCS 274 | Nonprime Mortgage Lending

Nonprime Mortgage Lending: Most lenders aren’t willing to let you get a loan or get refinanced if you have more than one late payment on your mortgage in the last 24 months.

I went to Carrington and also to Angel Oak to give you an idea on some of the things that they’re promising or discussing. On Carrington’s website, Carrington’s non-prime loan product is an ideal solution for consumers with lower credit scores, high debt to income ratios who are self-employed, had a recent credit event. Just foreclosure, bankruptcy, short-sale, missed credit card, or late mortgage payments and may not be eligible for conventional or government loan products. One thing you’ll realize, most lenders aren’t willing to let you get a loan or get refinanced if you have more than one late payment on your mortgage in the last 24 months. That’s a big thing. If you’ve got more than one late payment, if there’s had to be a reason like you didn’t get the credit card or the account, you had to get an explanation letter from your previous lender for why there was more than one. If you had more than one, you got to basically wait until that one kicked off at 24-month period before you get refinanced.

There’s always been lenders around that would do a loan for somebody who just went through bankruptcy. That’s been around for a while. Those are not a big surprise, especially the purchase refinance and cash out loan programs that they’re trying to do here. You’re not making your payments, you’ve got high debt to income, they will go ahead and let you do pull cash out. They’re probably not talking about low interest rates. They say low interest rates and lows of fives and sixes, but if you’ve got dings, you have to offset that risk somewhere else. Maybe that’ll be a low interest rate, so your interest rate goes up or you got to bring a bigger down payment.

Single family homes, town homes, and the cars are allowed. Loans amounts with $1.5 million, half a million, credit scores down below 500. Bank statements are acceptable to verify income in place of IRS documents for self-employed borrowers. This is one of the things, when you’re doing manual underwrite, if you had enough money in the account and usually get six months reserves. I don’t know what the reserve rates are, but usually when you’re doing loans, somebody had to have so much in reserve. What does reserves mean? Secure payments worth $1,000. You had to have at least six to twelve months of reserves in your IRA statements and stuff like that. You have to have $6,000 or $12,000 on the bank council as reserves. That’s what they look as reserve. Fixed and adjustable rate mortgages are available. Angel Oak is doing a one five ARM. Angel Oak is doing it in 35 states, not including New York and New Jersey. They’re learning a little bit there, but they’re still doing it in a tremendous amount of the footprint of the United States. They’re not in Alaska. They’re not lying to do cash out here in Texas, which I find surprising. Angel Oak are doing it for two years now, doing some subprime stuff, which is not a surprise. Their stuff is at least 20% or greater in non-prime-subprime stuff. When the market turned south, what’s going to happen to those individuals? What’s going to happen to those borrowers?

We have a question, “Aren’t there laws in place to prevent the worst of the worst, Dodd-Frank?”

Dodd-Frank is a true law about stopping people from doing ARMs. Dodd-Frank means you get qualified and you need to make sure that person person’s affordable. Dodd-Frank was written but it didn’t have clarification on exactly what it could cover. That’s what’s made Dodd-Frank horrible, is that it didn’t honestly help anything. I see the ex-senator Barney Frank on TV being awarded for Dodd-Frank. I’m like, “Dodd-Frank didn’t help anything.” Dodd-Frank was a knee-jerk reaction that penalize more so the mortgage bankers and mortgage brokers and made it harder to get loans done. It didn’t really stop people from lending. It made it difficult.

I don’t want to come across like I’m bashing Carrington or Angel Oak. They’re going out, they’re creating the things they’re going to sell this stuff off. It’s the typical thing that if you give people an inch, they’ll try to take a foot or if you give somebody a foot, they’re going trek the mountain. They’re going out and making things happen. They’re going out and they filled in an area where they’re self-financing these mortgages to the defaults, to the people that are bruised. This is what it comes down to. As I said before, ARMs, the monkeys are running the circus. I agree to this. I don’t want to come across like I’m bashing back because that’s not what I’m doing. What I’m simply going to cross here is an advocate for what we do. You have to be prepared that we’re going to see a lot of the same thing again.

When I see things like this, when I see lenders, when I see companies going out there and doing this non-profit and people coming to the table, you have a lot of uneducated people, non-financially educated individuals out there that are doing things that they shouldn’t be doing. Let’s say someone got a 500 score, I can tell you right off the bat that they’re going to miss the payments. They’re going to miss their loan payments. The only thing that would make sense is if the lender escrowed their payments for a year, and that’s what these companies are doing. They’re bundling these big pulls together that are probably somewhere around eight yield, pretty good return for an investor, selling it off, and they’re done with it. That’s not their problem anymore. Maybe they’re retaining servicing for the servicing aspect of stuff afterwards. I don’t know the specific things. I didn’t get a chance to research the article.

What I’m saying is that when they’re bundling stuff from selling off to the market, it’s now pass the bucket. It’s somebody else’s fault. It’s somebody else’s responsibility to deal with. That’s why I reached out to Angel Oak to see if we can get somebody on the talk about and discuss any of the transaction. They’ve done six of the securitizations, the biggest one being that huge amount. That should tell you something. This isn’t going away. The note business is not going away. There’ll still be plenty of opportunity in future time to do this, to buy deals, and to make things happen. When you see 0% down or 99% finance where the bank is lending, that’s another thing in here, too, is that they are allowing sell concessions of 6% on owner occupied and 2% on an investment property. Concessions view a variety of things, reducing costs and paying closing costs on things.

There was a big subprime lender out of Dallas and California and I know a lot of people, quite a few friends that were working for them that are making a million bucks a year. They bought that million-dollar house, they bought an airplane, and they got it on a subprime loan themselves. If you’ve got good credit on the subprime loan, you get some really great rates. If you’ve got bad credit, you don’t have to be a rocket scientist to understand that everybody, that if these people already have a 500, fine deal. You’re not going to make them show tax returns, you really aren’t manually underwriting. You can say you are and you’re going to look at stuff, but honestly, that’s all lip for the most part. It’s scary to think about it.

Starting in the fives, one day at a foreclosure short sale, bankruptcy or deed lieu. One day they’ll finance you. Loans up to $100,000 to $1 million, credit scores not under 500, up to 90% Ltd. Debt to income up to 50% are considered. The owner-occupied homes and investment properties, not condos are considered, jumbo loans that are 500 in scores. What’s a jumbo loan? It’s a higher price loan. No prepayment penalty for owners. That’s nice. This is another thing. No active trade lines with housing history, so you don’t have any other credit on, they will finance you as long as you’ve got housing history. Housing history, that could be a rental, existing housing, an existing mortgage. It’s up to 6% or 2% for investment.

When I look at this stuff, I look at it, if I was a mortgage broker, I’d go, “That’s some pretty good programs. Let’s do more loans. They’ll offer to give me opportunity to new loans and reach out.” I’d be reaching out. If I was an Angel Oak, I’d be reaching out to every banker and every mortgage officer that I had and say, “Send me your applications. Send me the people that you turned down and I’ll see if I get you to approve and I’ll pay you for that. For every lead you send me, I’ll pay it.” That was what happened back in the day and it still happens, but that’s what I’ve been doing. You’re going to be seeing a return on that. I made a lot of money as a mortgage broker back in the day. Next thing you’re going to be seeing is the evolution of pickup pay or the negative loans showing up.

We have a question, “Is this non-prime loan a halfhearted knee jerk reaction to solve the housing crisis in America?”

NCS 274 | Nonprime Mortgage Lending

Nonprime Mortgage Lending: Affordable housing is a problem. Making bad mortgages is a really bad decision.

They think you’re helping people to get into a house without the long-range to keep people into the house. Affordable housing is a problem. Making bad mortgages is a really bad decision. It’s not affordability. It’s different than the mortgage side of things. This is not the Feds doing this. This is Carrington, Angel Oak, and a couple others out there. These guys have a lot of money, but lending on it, they’re not government loans. If you look at the fact that the average balance was $363,000, that’s not affordable housing. What you have happening going on right now for the housing side is a different thing than “Let’s get people to buy homes.” It doesn’t make sense. In areas of the country, homes are so expensive, it doesn’t matter. You have to have a pickup pay or negative loan to be able to afford it. Having a 6$ or 7% interest rate, we’re going to put 10% down or more. Putting 10% down is not bad, but at some point, people are going to jump into the game and want to get that business.

They’re going to go from 90% to 95% or 92% finance. It’s just the start. The 10% down is not a bad thing because you have something to put that much down in the game, but you’re still going to be dealing with somebody who has a credit score that has not shown to be on time, who is struggling to make their payments because it’s not enough, or half of their income is going to pay their bills. That’s a scary factor. It’s building a house of cards in the finance industry to make things happen. If you look at the default rates on the other debts, if you look at the lower credit scores, is because they’re not paying the student loans and not paying the credit cards, their house, or their car payments, “Let’s give them a loan.” It doesn’t make any sense.

I watched a documentary the called The China Hustle, which talks about something different than the mortgage industry, about these companies that go on and raising capital for these Chinese companies that come into the US markets and reverse mergers and they’re raising all this money and there’s not any real company back home in China and it’s legal back there in China to do that. How companies, like Bank of America, Wells Fargo, all these other big institutions in, when we hear about fraud, we hear about things taking place, nobody goes to jail. They just get a big fine, so they start budgeting fines and fraud into their budget because they know what’s going to happen. That’s going to happen in the mortgage industry. You’re going to have, especially if you’re doing ninja loans or “Let’s just show bank statements.” Yes, it’s good for us note investors, because it’d be more inventory. That’s the whole point of this is. You’re going to see a repeat of it in the part about timing your markets or being responsible in the markets as knowing what’s going on in the future, when that’s going to happen. Let history repeat itself.

For us, note investors, is this an opportunity for you? It’s opportunity for you for a couple of things. One, for paper in the future, maybe in the near future, who knows? The thing too is if you look at some of these programs that are in the States that are available, if you’re buying loans in some of those states and you’ve modified an individual you’ve done a trial payment plan, these may be an opportunity for you to help someone get traditional financing. I have to wait for them to have a seminar to FICA score. That’s the other thing we’ll look at. That’s the other side of the economists talking. You’ll never find a one-armed economist unless he had an arm amputated. On this side, it’s bad for this, but this other side, it’s good, so that’s looking at that for us positioning in the scene of states that they’re in, finding out their loan limits are, finding out some of that stuff is good for you to know so you can talk to your borrowers and the ones that you’ve bought. Talk to the borrowers on the contract for deeds that you’ve done and see the opportunity. The return and the yields on the mortgage industry doing these loans are higher than equities and bonds. When you’re getting somebody who has 7% or 8% return or yield or interest rate, whereas a 1%, 2% or 3% on the bonds and equities or stuff like that, it makes sense. You can double your return. Who’s not going to put their money into the market? Who’s not going to start a mortgage company?

I’ve talked to a couple of guys out in California that had been big mortgage guys in the past and they’re looking at shops. They’ve been sending stuff out to be rock and rolling. While this is getting a little bit news down, like we said, it’s already been around for two years, you’re going to see more of this hitting the streets and don’t be surprised when you start seeing stuff like that, so be aware and make smart decisions, but also keep your eyes out and your ears peeled for opportunity. There are definitely opportunities out there. I bring this up because people have always been saying how we all thought that this is the last year. We said that for ten years now while we thought this would be around for three to four years and three or four years later, we think it’ll be around for another three, four years later.

This whole secondary market, the sub-prime note buying side, is going to be around for a while. We’ve cleaned out most of what we had in 2010. You look at the peak back in 2008, 2009, 2010, there was roughly fifteen million mortgages, fifteen million borrowers are underwater. They owed more on their house than what it was worth. That’s going to happen again in areas of the country where you see prices becoming unacceptable or unaffordable for a lot of people. Those prices can only keep climbing for so much before something happens, before they dropped down the thing. That’d be scary to those who bought at the peak, which a lot of people do. They don’t notice sell off or they get out, went into the low, they tried to get the high, “I’m going to be a real estate investor. I’m going to be a landlord. I’m going apartment house with people.” What happens if the market turned south? Now you’re upside down. Now you can’t pay your bills because you’ve got to adjust your payments and stuff like that.

I just want you guys to be aware for one thing. This stuff’s going to hit the market again. It takes me back to the scene from The Big Short. If you’re doing that make securitizations, you can go on and read every document, but they’re not going to. I will tell you this, they’re not going to read every document when they bundle it up and sell them all off. If 80% plus are subprime loans on the stuff, 20% of subprime loans is not going to hold it up. There are plenty of borrowers that have eight plus credit default for reasons as well as self-employed people. Doctors, lawyers, dentists have downturns as well. We saw plenty of that back in the day and it’s going to happen again. We’re going to see this coming. It’s important to see what’s going on in the industry. Yes, we’ve got this around for a while. Stick around. Understanding what’s going on. Learn to leverage this stuff. I would say we’re going to have a bigger downturn sooner than later.

NCS 274 | Nonprime Mortgage Lending

Nonprime Mortgage Lending: You just got to know there’s opportunity everywhere. You just got to know where to look.

There was a seven-year run up. I got into the mortgage market in 2001 and it is boomed up there for basically seven years. Mortgage environment started to boom up here for the last couple years, so I say we’d probably have anywhere from twelve to 36 months before we start seeing stuff. Lots of opportunity. You just got to know there’s opportunity everywhere. You just got to know where to look. The idea is not to try to take too much opportunity as you can’t take it all in but being an inch down and understanding your opportunities that are available. Stay tuned because there’s a lot of great things would be happening out there for you.

Go check out the articles, check out and learn what’s going on with those companies in the non-prime loan program. You look at it and think, “History is repeating itself.” That’s one of the big things I want to know when I’m reaching out to some of these companies is, “The people that are doing these things, what were they doing ten years ago? What were they doing in 2001? Were they in the industry or were they doing something else?” I guarantee what’s going to happen is they’re going to start bundling those things to sell off again. Somewhere, the guys from The Big Short are sitting back and laughing. Go out, do something, and we’ll see you all at the top.

 

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