As the first deputy director of the Consumer Financial Protection Bureau, Raj Date helped write new rules for mortgage lending, including designing a qualified mortgage—one with strict credit and income requirements for the borrower and no balloon payments, among other features. In return, lenders who issue qualified mortgages will have some protection against consumer lawsuits.
What about those financially sound borrowers who don’t meet CFPB guidelines? Well, now Date is trying to build a business that will serve them. He left the CFPB last year to found Fenway Summer, a Washington-based firm that plans to provide loans, including interest-only mortgages, to borrowers he considers safe risks even if they carry debt that exceeds the agency’s proposed threshold. “The reality is it’s way too hard for good people to get loans today,” Date says.
The creation of qualified mortgages, mandated by the 2010 Dodd-Frank financial regulation overhaul, means “there’s a safe harbor for certain kinds of loans and there’s not for others,” says Date, who joined the CFPB in February 2011 after jobs at Capital One Financial (COF) and Deutsche Bank (DB). “If there’s no safe harbor, then you have to be especially confident in your ability to calibrate and price for credit risk. Frankly, that’s what the differentiator is going to be for the firm we’re trying to build.”
Kathy Laurienti, owner of Paisano Sausage in Denver, is buying a $230,000 townhouse in Westminster, Colo., and could use help from a lender such as Fenway. Although she has a prime credit score, no personal debt, and $145,000 in her bank account, JPMorgan Chase (JPM) will finance only as much as $100,000 of the cost. That’s because she earned $43,000 last year from her company, which lost $12,000, making her ineligible for a higher loan because of debt-to-income restrictions. “This is my bank. They know me when I walk in the door. It’s like it doesn’t count anymore.” A spokesman for JPMorgan declined to comment on the loan.
Date, who estimates that nonqualified mortgages may make up as much as $1.5 trillion of the $10 trillion home loan market, has joined a small list of lenders offering what some in the industry call “nonprime” loans. Citadel Servicing, a lender in Irvine, Calif., raised $200 million in April from a private equity partner to offer mortgages to borrowers with blemishes such as a recent foreclosure. Citadel Servicing offers loans of as much as $750,000 in 11 states to borrowers with credit scores as low as 500, according to its website. Interest rates on the 30-year loans, which are usually adjustable after seven years, range as high as 1.25 percent for borrowers with the lowest credit scores who can make a 40 percent down payment.
In May, Athas Capital Group began offering 11 percent rates on adjustable-rate loans for borrowers with FICO scores of at least 550 who can put down 40 percent. Athas CEO Brian O’Shaughnessy says his subprime mortgages are different from the stated-income loans of the housing boom that didn’t require down payments or documentation from borrowers to prove they had earnings. “This is the sane and safe subprime,” he says. “These borrowers have skin in the game.”
Analysts expect to see banks loosen standards to offset the decline in refinancing activity resulting from higher rates. “At least a few lenders are starting to dig into the nooks and crannies of borrowing,” says Keith Gumbinger, vice president of HSH.com, a mortgage information website. “Some borrowers may find responses in the market where they did not find any before.”