Bruce and Aaron Norris are joined this week by Cary Pearce. He is the branch manager and senior loan manager for Flagstar Bank. He has over 25 years in the lending business, and Bruce has known Cary for just about as long as he’s been in the business.
- How many years has Cary been involved in the real estate industry?
- What was the credit score expectation during the time of the downturn, and did the debt ratios even matter?
- What programs could he see re-implemented today that were aggressive at the time?
- What changes will Fannie Mae’s ratios be undergoing that will be a game-changer next year?
- When Fannie and Freddie went into government receivership, how did that change the game when it came to funding loans through them?
- What is the ratio right now of refis to purchase loans?
- Is the lending business more competitive now than it used to be?
Bruce Norris is joined this week by Cary Pearce. He is the branch manager and senior loan manager for Flagstar Bank. He has over 25 years in the lending business, and Bruce has known Cary for just about as long as he’s been in the business.
Cary said he has actually been in the business 35 years, having started when he was 15. Bruce just didn’t think he looked that old. One of the employees at The Norris Group, Robyn, worked for her father in the lending business when she was 14. She had ten years of experience at 24 years old.
Bruce and Cary began by talking about the lending policies in 2006 when the craziness ended and the transition they went through. Bruce began by asking him who he was working for during those years. He said from 2001-2006, he was with Home123, which was a division of New Century. New Century was one of the top three subprime lenders in the nation. This means they felt it first before anyone else. 2007 was when everything hit the fan. It was somewhere around March that they took four billion dollars to Wall Street since that’s how much we did per month in total volume with the subprime and a paper, and Wall Street said they’re not buying it. Another month went by, and there’s $8 billion sitting there, and Wall Street wouldn’t buy it. The company went out of business overnight.
This happened over a two-month period. They were structured as a REIT, so as a REIT, they don’t retain a lot of capital. They pay out 90 percent, which is how most REITs are structured, so they didn’t have the capital to weather that storm. Bruce wondered what happened to that eight billion dollars of paper. Cary thinks it ended up getting discounted and sold off. It was probably a massive haircut, around 50 cents on the dollar. This was not a conservative lender he was working for at that time. Bruce wondered what some of the lending programs were at the time that were really aggressive. The best example was his neighbor across the street came to him to refinance two of his rentals in San Bernardino. They were able to do a 90%, non-owner cash out stated income. He ended up losing both of those properties, and the cash was parlayed into other properties in Utah. Unfortunately, he ended up losing those too.
The mindset at that point was just to get as many as you can. He actually got aggressive and started buying units. One of the properties he picked up in Utah was a 20 or 30 unit property; and he picked it up for a million dollars, but he leveraged those two rentals in San Bernardino to get down for it. He did it with 10 percent down, which was amazing. This was very aggressive financing back then.
Bruce asked what the credit score expectation was back then or whether this or the debt ratios even mattered. Cary said the credit scores did matter somewhat. If he could guess, the stated income was somewhere around 660-680 in that range. On a full doc, they would go all the way down to the mid 500s, around 580.
Bruce next went on to ask them about the process when they created the paper and how they funded it. When you are looking at $4 billion of loans in a month, he wondered if this is initially funding through a credit line. Cary said it was a warehouse line. This was in-house, and then he brought it to Wall Street. Bruce wondered what the appetite was for all you could write in 2007, which Cary said it was spring all you can. That’s why Wall Street was crazy for it, and Cary’s company pooled it. They would sell it in pools of $10-$20 million, and they would sell it. Wall Street would then securitize it, and then they would sell it off. After this, it’s history.
You hear about overlays a lot, which refers to your loan program that exists but people want to be more conservative. Bruce asked Cary if they had any overlays or if that was out the window at the time. Cary said back then no, but today yes. Bruce wondered what some of the programs were that were actually safe enough to have today, ones that seemed aggressive at the time but could be re-implemented. Cary thought the 80/20 was a great program as long as it was full doc and you could manage their debt ratio with provable income. It’s better than FHA because there was no mortgage insurance. As long as it was a full doc, it was a great program. A lot of those probably failed only because the whole market sunk 50 percent. If it was a standalone in a normal market, it probably would have had a really good success ratio.
When you’re saying full doc, it’s similar to V.A., which has one of the best performance ratings out there on a zero down loan. They vet it well, and they have to have some type of reserves. Bruce wishes we could get back to something like that. Bruce talked about one loan program where the loan could move forward to another buyer and the foreclosure process would only be the back payments. You could raise ownership a lot if you had the chance to implement that. When it first came out, it was all subprime. It was mainly targeted to the lower FICO people, but Fannie Mae even came out with their own. It was a standard A paper fixed-rate first and a fixed rate 15 or 30-year second. Quality rates, and it was obviously pulled off. It wasn’t stated, but when the market crashed, all of those programs died on the vine.
Bruce asked about when Fannie and Freddie went into government receivership and how that changed the game when it came to funding loans through them. Cary said they started enacting the loan-level price assessments for all kinds of scenarios. It used to be if you had a 740 plus FICO and you were putting 20 percent or more down, you actually got a slight improvement to the rate. When all the chaos happened, they enacted all these low-level price adjustments. Now, a 740 borrower that puts 20 percent down actually has a half a point hit with the pricing.
What Bruce found interesting was when you’re talking about Fannie Mae, and there was something Cary thought could happen within a year that would be a game-changer. He heard their ratios that were going to be acceptable might change, and he wondered what the timeframe was on that. Cary said that is happening in January next year. They will have to abide by the QM rule. which says you can’t be over 43 percent on your debt ratio. They’ve had a window, and it obviously has one more year before it expires. The gist they are hearing is that they’re not going to get renewed and all Fannie and Freddie loans are going to have to comply with a 43 max debt ratio.
Bruce next asked what impact that could have on the loan business and if that is going to impact the purchase side more than the refinance side. Cary’s people say that is about 25 percent of the business, so that’s a big piece of the market that will go away unless they come out with better programs. Right now, Fannie and Freddie are talking about finally coming out of conservatorship, so things could get tighter over there. He doesn’t know if they’re going to be gun swinging like they used to with all the crazy programs. They will be under watchful eye for a while.
Bruce asked what the ratio is right now of refis to purchase loans? Cary said we are about 70% purchase and 30% refi. Bruce wondered what the ratio was when interest rates were approaching 4 3/4%. Cary said at this time we were 90% purchase and 10% refi. There was just a reduction in overall business. When rates are down to three and a half, the refi ratio was 50 percent, but as it rises, it keeps dwindling. For a while when rates got up to five, that’s when refi levels dropped to about 10 percent.
Bruce asked if people typically get cash out when they refi. Cary said today we’re seeing more of that. More people are pulling cash out than doing the rate term because most of the people that got their loans within the last five years are between 3 1/2 and 4 1/4, so most of those don’t really make sense on a rate turn refi. When they need to cash out to pay off other debts, then it can make sense.
Bruce asked if Cary is connected to credit lines behind a first. He said yes and that they do HELOCs, which go up to 90 percent of combined value. You have your value minus the first, and then up to 90 percent is how much you can bridge the gap with the HELOC. Bruce wondered how aggressive people are with this. He said they are actually seeing quite a bit. They did not do them at his previous company. Now they do, and it has definitely been a helpful tool.
Bruce next asked about HELOCs on rentals. He said they don’t work with these, only primary residence and second home. They lend to investors under Fannie and Freddie guidelines, even on jumbo. The credit line is just not a product that they currently have. Bruce wondered how he would implement something new to a lender. He doesn’t think their bank, as conservative as they are, would ever go to a non-owner HELOC. they just are too gun shy.
One of the things that Bruce had the privilege of doing was going back and presenting in front of Fannie Mae in Washington, D.C. He has done this three times, and the first time was close to the cycle where it was really bad. They got invited back by the chief economist of Fannie Mae. When he presented, he brought the performance of his loan portfolio because at that point, you can imagine what they thought of investors as far as risk tolerance. He had a loan portfolio that was basically ninety-nine percent current at 10 percent interest to exactly the people they thought was terrible to lend to. That was the message he was trying to get across to them. You’re talking about being afraid of speculators. It’s a great idea, but an investor is a different person.
Cary doesn’t understand why the industry views the investor as such a risky proposition. Bruce asked if a lender like Flagstar Bank, who he works for, has the option to do that or if there is restriction. Cary said they have the ability to do portfolio products, and they have several that are very good. They have a doctor program. They have a professional program for CPAs, lawyers, certain people in the medical field like doctors, where they do a zero down up to 850,000, which is a very aggressive product.
Bruce next asked if there are any risky loan programs in the marketplace that he sees as a potential problem going forward. Cary said not really today. Everybody coming in has to qualify, at least with everything Cary’s company does. There are still some lenders out there with the subprime that are starting to come back, like bank statement programs. They have access to them, but most of their guys don’t do it.
Bruce asked if that is still a very minor part of the marketplace as opposed to the standard loans. Cary said yes, and it only makes up about 1-2 percent. When he talked about presenting four billion dollars of paper a month from where he worked, Bruce wondered what the ratio subprime was as far as a piece of the market at that point. Cary said at New Century, subprime was 75 percent of the overall volume and 25 percent retail. As the overall A paper world, it was at least 50% of the subprime market. It’s no wonder it became such a problem. The sad thing is a lot of people with good credit got stuck in those subprime loans without realizing it. People were just very excessive on the phone, and they sold them on the program and didn’t really know what they were doing.
When it comes to the ratio right now of fixed-rate to adjustable, the percentage is at least 90 percent fixed rate. His company does very few ARMs. The ARM business is played for a portfolio program since it’s an ARM and not a fixed. When you have somebody that’s a little outside the box, they still have to document everything. For instance, if they have a lot of assets, they’ll help use that as extra income to qualify. That’s where they try to think a little bit outside the box to help the people qualify. But still, the ARM percentage is very low.
Bruce asked how someone is looked at by the lending world if they are self-employed. He said this is tough because most people that are self-employed write off a good chunk of their income, and at Flagstar they have to do a two year average of their net. That makes it difficult.
Aaron asked Cary if he is getting any requests for ADUs. He said a little bit, but they haven’t really designed any new products for it. The agency is okay with it, so they definitely have been able to get those loans done. Aaron asked if he is doing a HELOC on an existing property. He said most of the stuff they do is purchase, so people are coming in with however much down. With Fannie Mae, you can go as little as 3 percent down and up to whatever. It depends on the client. Aaron asked if he is having any issues with the appraisal coming in on purchases. Cary said the key there is there has to be at least one, hopefully two or three, that are similar properties and have the same accessory unit in that same market. If you have one in a market that doesn’t have the comps, it will be a challenge.
Bruce asked if Flagstaff portfolios a great deal of what they fund. Cary said they sub-service almost everything. They do end up selling the loan off, and then they self-service it. That way they’re not tying up mass amounts of capital. They do service a very large portfolio, close to $200 billion.
Bruce asked about when he funds a loan whether there is another group of people that look at the documentation after the facts of the loans closed. He wondered if there is some process where there’s somebody looking at what was done and seeing if there was anything done that they don’t like? He said yes. Quality control exists, although he doesn’t know what the percentage is. He doubts that it’s as high as 10 percent, but he thinks that the general rule is to try to do it at least 10 percent of the loans. They do get some things that come back. At their previous company, this happened the most to them with their jumbo product. They would sell to the big banks like Chase and Wells, and if they didn’t like something, even after they bought the loan, they would come back and tell them to fix it. There were even a couple times they were told they were not buying the loan from them and to take it back. A lot of times they were given the opportunity to fix it, and they would. There were a few where they just couldn’t and they ended up having to take the loan back or rebuy it.
Bruce asked what the big issue is when they do have to take it back. He wondered if it is a ding on your scorecard or if it is just financially inconvenient and not something that you want to do. Cary said they don’t want to do it because they have to put it in the portfolio, and that’s just tying up capital.
Bruce next asked how long the risk lasts for an originator. He wondered if someone could call you out 3-4 years from now and tell you they found something wrong with the loan. Cary said this was something he was not sure about mainly because of all the new RESPA regulations, Dodd-Frank, and TRID. Cary said their NMLS number is on every trust deed that goes out. If a client complains, and enough of them complain, they could probably shut them down as originators regardless of how much time has passed. There was an originator in Southern California who did some less than above-board things and ended up getting his license pulled. It is a big deal now, way more than it used to be.
Bruce wondered how competitive the lending business is now compared to the past. I’m sorry, I’m having none of that connection, I think. Yeah, that’s okay, we’re almost done. Is the lending business more competitive now than it used to be? However, Cary said it is just as competitive now as it always has been. We have a good mix of the big banks like Flagstar. You have your independent brokers who always get their piece of the pie. It has been that way for most of the time he has been in the business.
Bruce wondered since Cary can go out of California with his new business if this means he can loan in Florida. He said yes and that they can actually loan in all 50 states. Bruce also wondered if you can loan investors on rentals. They can also loan investors on rentals as well as they have a construction program. He is not an expert on it, so he usually just refers that off to someone who is, but they definitely have a good product for it.
If you want more information or need to talk to Cary, his direct line is (951) 228-7782
The Norris Group originates and services loans in California and Florida under California DRE License 01219911, Florida Mortgage Lender License 1577, and NMLS License 1623669. For more information on hard money lending, go www.thenorrisgroup.com and click the Hard Money tab.
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